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.

GOLD INTO FOCUS ONCE AGAIN

Gold and silver were on a downward move till Thursday. The decline was mainly due to the two important data reports that were published on Thursday. The US CPI edged up by 0.1% and the Philly Fed Survey showed that that manufacturing deteriorated due to Hurricane Sandy.

The US Jobless Claims reports also added to the decline in gold and silver prices.

On Thursday, the price of gold declined by 0.94% and settled at $1,713.8; Silver also decreased by 0.64% to $32.67. During November, gold slipped by 0.31%; silver rose by 1.1%.

However, Friday was altogether a different picture. Gold  edged up reaching 1713 $.

The EU economic news and the ongoing US Fiscal Cliff worries put traded and investors in a risk averse frame of mind,

If the so-called fiscal cliff package of measures comes in as planned on January 1, the US economy would likely tip back into recession, which would have a devastating effect globally.

The fiscal cliff is essentially, a combination of the expiration of Bush era tax cuts, 8-10% spending cuts in defense and non-defense programs, and the raising of the debt ceiling.  If all components of the Cliff were to come to pass, we would see a crippled US economy that is thrust deeply into recession, and a weakened national defense. 

It will result in an increase in inflation and will thus push up gold prices even further. Some expect gold to cross the $2000 mark too.

This fiscal cliff will have the greatest effect globally and it has already taken over the Euro zone. It poses to be one of the greatest threats to global recovery,

Financial markets were also on edge after Gaza militants fired rockets at both Jerusalem and Tel Aviv, aiming for Israel’s political and commercial hearts and prompting the country to call up thousands more reservists in readiness for potential ground operations.

Moreover on the geopolitical front, the rising unrest in Israel resulted in pushing up gold and crude oil.

Israel’s pledge to take out more Hamas leaders has led to increased tensioned in the Middle East. This situation would turn investors towards gold thus pushing up gold even further.

Gold being eyed by investors will result in increased demand for gold.

Adding to this, the two world giants- India and China have also shown great demand for gold. Demand in India, the world’s biggest gold buyer, rose to 223.1 tonnes in the third quarter, a sharp jump from the 181.3 tonnes in the second quarter and the 204.8 tonnes from the same period last year 

Indian demand was probably due a rebound after several weak quarters, and a strengthening rupee probably provided a catalyst for the third-quarter increase. 

Chinese demand has also feel to a disappointing 176.8 tonnes in the 3rd quarter.

Slower economic growth was blamed by the council, which said stronger conditions on the 4th quarter may increase demand in china.

That is quite likely, but Chinese demand will probably only grow significantly when a rising price trend is re-established or domestic inflation rises again. 

Given that China and India together account for about half of total gold demand, it seems logical to assume they are vital to the outlook  for prices.