Gold ETFs shed 31 tons in one day

Difficulties continued to confront the gold and silver markets overnight, and even more so early this morning, as recent and growing fund liquidations appeared not to be easing up a whole lot (read: at all). Players were caught between digesting President Obama’s references to US budget freezes (and other assorted government size and spending-cutting measures), and the upcoming FOMC statement.

More than a few Fed watchers now expect that the Fed announcement might just contain a baby eyas or two, in terms of verbal references to future interest rates. The recent “landing” of such now still little (but they grow fast) “hawks” (as Plosser, Fisher, Kocherlakota) in the Fed’s cozy nest has certainly caught the attention of advocates of perpetual zero-level interest rates, as it has the “attention” of commodity-oriented spec funds.

As recently as Jan. 13, Fed Chairman Bernanke stated that "we're seeing some improvement in the labor market. I think deflation risk has receded considerably. And so we're moving in the right direction." That direction being what? The one where the Fed sees a sizeable enough improvement in (primarily) the US labor market in order to feel confident that pulling the interest rate trigger does not run the risk of undoing the string of quite decent economic statistics which have obviously contributed to certain funds leaving the gold market for ‘greener’ pastures, at least partially.

Spot prices traded as low as $1,324.20 in gold, $26.68 in silver but platinum and palladium underwent decent bounces from their lows (near $1,775 and $780 respectively) and appeared better able to stage price recoveries from those levels. Once again, the declines in the yellow and the white metal took place despite a slightly lower US dollar (down 0.11 at 77.81 on the index) and despite a fresh, two-month high (at $1.372) in the European common currency.

The Dow’s reaching the 12K level for the first time since June of 2008 may have also contributed to the “developing situation” in the precious metals markets this morning as funds become more comfortable with the putative bets they appear to have been making on equities, for a change. Then again, the news that US new home sales jumped 17% in December, could have also added to the Wednesday market brew.

Over in scenic Davos, Switzerland the world’s Who’s Who are cloistered in posh surroundings and mulling over the fact that while the world has obviously stepped back from the bottomless pit it was staring into in 2008, there are still some “agenda items” left to tackle when delegates return to their desks in a few days. While the word “recovery” is on practically everyone’s lips (and is also in part responsible for the recent metals’ selloff), it is a term that has a second edge – one that bears watching closely. To wit, AP reports that a Davos global panel noted that:

“The [the same] recovery is fueling demand that is causing fast gains in commodity prices — oil and metals, for example — and runaway food prices that are blamed for increasing social instability in some places and account in part for the recent revolution in Tunisia. For many countries, panelists noted, this raises the question as whether to raise interest rates to dampen consumption and bring down prices.”

Soaring commodity prices are something the glitterati gathered in Davos might just want to keep a sharp eye upon, lest they gather there in, say, 2013, and conclude that “the [next possible] global crisis was unnecessary and could have been avoided IF… (insert your favorite regulatory or self-restraint-exhibiting behavior here)…That (pretty much exact statement) is the current consensus on what took place in, and since 2008, you know…

Curiously, the US dollar did not get much of a lift from Mr. Obama’s Tuesday night call for freezing US federal expenditures. Perhaps the greenback’s traders were more inclined to factor in a “steady-as-she-goes” FOMC announcement, hawkish overtones (if any) notwithstanding. At any rate, the gold market has broken through some previously “not-in-your-wildest-dreams” type of price supports and short-term moving averages.

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