Gold plummets as tax deal looks promising

President Obama took some of the pressure off of Mr. Bernanke and the Fed having to go beyond their $600 billion QE2 plans with yesterday’s broad tax break extension compromise. Although the (commodity, currency, and stock) markets went into a frenzy of buying and/or selling, depending on how the news was being interpreted, by the end of the day a couple of conclusions became a tad clearer to them.

One of the take-away findings was that the tax-cut deal – while looking like just another version of a QE – is in fact a “true” stimulus, and the most likely one to succeed in boosting US economic growth in the coming year, while possibly also adding some sorely needed jobs to the equation. There will now be more money, for everyone, no trickle-down, or up; just a general sloshing around of yet more dough.

The Obama compromise (roundly criticized by liberals) shows just how different the US and the European approaches to the problem of growth and better employment numbers really are. The US administration feels that growth and stability will issue forth from stimuli of varying types. The EU sees stability as a precondition to growth and remains reluctant to spend its way out of a tight economic spot.

Extending the lease on life of the Bush-era tax cuts may prove (it already has, as of last night) quite unpopular with those who voted for Mr. Obama in the hopes that he would “soak the rich” but the move is largely seen as the catalyst of a probable half-percent boost in US GDP and it does reduce the odds that the Fed will need to do anything more in terms of bond purchases.

Up to this point, the onus was solely on the Fed to do the “dirty work” of trying to steer away from the brink and get the American economy back on to the road to solid recovery. Now, with this extension, more than $2,100 will “appear” in the pockets of anyone earning more than $106,800 and about $800 would be spendable by those making $40K per annum. The hope is that the money will find its way into American cash registers as opposed to savings accounts.

While the news from Washington initially motivated gold, other precious metals and commodities to much higher price ground, the temptation to take profits (especially in the wake of a US dollar that refused to give up the 80-mark on the index as the day wore on) became more compelling and the morning’s gainers backed off their lofty peaks – and then some. The commodities complex fell by the most in one week by early this morning, as a novel combination of “buy the news/sell the news” and the resurgence of Chinese tightening fears drove (at least) some copper and gold specs towards the exit doors.

At last check, gold bullion was trading some $55 below Tuesday’s peak near $1,431and was being quoted at $1,374.20 the ounce in New York. The same tax deal that was seen as dollar-negative yesterday was being reassessed as dollar-beneficial this morning – the implications being that a) increased spending will help the US recovery and that b) speeding up said recovery will result in the Fed exiting its accommodative stance sooner, rather than later. That said, the yellow metal was able to bounce off the $1,382 level (and immediate support zone) for the time being. Overseas traders have pegged $1,370 and $1,350 as potential targets for the precious metal on a technical basis.

Silver continued to recover after having experienced a major freefall on Tuesday, but only up until around 10:20 this morning. After that, silver fell about a half a dollar and approached the $28.20 area with increasing speed. The white metal lost nearly $1.50 by day’s end and looks set to continue to be very volatile as we round the few final turns into the year-end sessions.

The latest spot bid indications showed silver trading at $28.15 per ounce. Thinning participation after next week will contribute to the on-going roller-coaster rides in silver. Platinum and palladium drifted lower after also having lost hefty percentages yesterday. The former was trading near $1,670 and the latter under $715 during the mid-morning hours in New York.

So, what do copper and silver have in common, other than the fact than the latter is largely a by-product of the mining of the former? Well, enter the spec funds – once again. The flavor of the day, week, month, quarter, year, and past three years as well.

Marketwatch’s Jim Jelter throws out the following road flares in an effort to temper the euphoria that has reached levels whereby ANY news – good or bad – has been used to buy, buy, buy, and little (zero, actually) in the way of carefully looking ‘under the hood’ (in terms of fundamentals, anyway) has been carried out at a time when sentiment and momentum have been ruling the (trading) day. Take it away, Jim:

“There have been a couple of recent developments that accelerated copper’s ascent, including the news Tuesday that J.P. Morgan Chase & Co. over the past few weeks had snapped up about $1 billion of copper on the London Metals Exchange, more than half of all the copper stored in the London’s warehouses. The bank claims it was buying on behalf of clients. Others suspect it was trying to corner the market. Regardless, the copper-buying binge is a huge bet on the red metal and leaves outsiders wondering whether this reflects a belief that global manufacturing is truly rebounding to the point where copper could soon be in short supply, or whether this is simply big money engineering a speculative “pump-and-dump” that’s likely to burn anyone jumping on the bandwagon at this late stage.

“And then there’s silver. Silver futures have nearly left the charts, up 76% since the start of 2010, to trade at a 30-year high. As the most volatile of the three, silver is also most vulnerable to an implosion. But at $29.78 an ounce, it’s certainly been good to those with the foresight, fortitude or dumb luck to ride it to the top this year. Can the rally be sustained? That probably depends more on fears tied to the European debt crisis, the Fed and the dollar than it does to underlying demand for any of these metals. But anyone contemplating taking a position now in gold, silver or copper futures — especially if using dollars to buy them — should understand that the risks get bigger when these contracts start taking out record-highs.

“Dazzling, yes. But at these levels, metals are potentially dangerous.”

Until Friday, (there will be no article tomorrow, due to…more travel) – tread with (utmost) care.

Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America

Websites: www.kitco.com and www.kitco.cn

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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