FISCAL CLIFF HANGS DOWN GOLD!

Gold prices ended Friday weaker, following weakness in equities.

Gold fell almost a per cent on Friday and declined consecutively for the second month. This decline was due to investor worries over the US Fiscal Cliff resolution. 

In the Indian market, by the end of Friday’s trading session gold was down by almost 400 rupees per 10 gram and silver by 1700 rupees per kg. Global news led to these volatile movements in the domestic markets.

Some believe that the fiscal crisis might lead to a recession. Some even lightened their positions in gold as they feared that a failure to reach a budget deal could lower gold’s appeal as an inflation hedge.

Moreover the end of month profit making saw an outbreak of sells orders. Bullion prices saw a further drop after John Boehner (Speaker of the House) said that lawmakers from his Republican party and President Barrack Obama were in a state of deadlock over a budget deal that needed to avoid a $600 billion fiscal cliff.

Apart from the Fiscal Cliff there is a lot in basket for gold and other precious metals. Important US Economic Data, monthly employment data are also due. Global manufacturing data will soon be released, including China's November HSBC manufacturing PMI, the U.S. November ISM manufacturing index and the November Euro zone PMI. However, investors believe that any development regarding the fiscal cliff will overshadow all these data reports.

Currently markets worldwide have glued their eyes on the fast approaching “fiscal cliff”.

However some investors believe that fiscal cliff might even push up gold prices further. Their reasoning is that precious metals are now an asset class, and just like every other asset class prices will fall as investors turn to cash while some debate that it will pull down the prices as the demand for gold as a safe haven will decline.

Failure to avert the cliff will push the US into recession and will pose significant difficulties for the world’s largest economy if they are to continue their economic recovery from the GFC.

As long as the fiscal cliff debate continues, gold prices should remain within their current narrow trading band. Till then Gold’s ability to hold the low $1,700 area suggests that the market has strong support at that region.