Gold falls as Greek impasse prompts risk-off

In the Lead: “Crisis Mis-Management”

Gold prices fell for a second session on Wednesday as physical demand remained muted and as the US dollar picked up additional strength against the euro. Market participants were focused on upcoming Fed and Davos World Economic Forum statements before making any substantial bets in the precious and base metals’ spaces. Gold’s decline was partially attributable to the fact that Greek debt instrument holders failed to come to an agreement with that country as regards a debt-swap plan. The impasse prompted a “risk-off” day on Tuesday and the same sentiment spilled over into this morning’s trading action.

As regards the Fed and its policy statement to be made later in the day, the pundits expect the US central bank to stand pat on rates and to offer some language that implies an extension of current ultra-low rates for some time to come (estimates range from one year to two). However, there are also expectations that some words will be set aside to cover the idea that when rates do need to rise, they will do so without any hesitation on the Fed’s part. To wit: “Despite all protestations at the moment, if the economy continues to expand at its recent trend, the Fed would almost certainly be prepared to exit at the start of 2013,” said Joel Naroff, the President of Naroff Economic Advisors.

For the moment, it would appear that Mr. Bernanke’s institution wants to do very little to upset the US economic apple cart (expected to make progress at the rate of about 3% this year). That stance however could also include not promising any QE3 to those who so desperately hope it happens so they can sell more hyperinflation scaremongering-laden newsletters. In fact, more than a handful of economists are actually expecting inflation to…fall in coming months – Goldman Sachs among them. The firm projects that US consumer price inflation will decline from 3.3% to 1.9% by the end of this year.

The Fed could lay out an explicit inflation target as well (2% or so), and it will present rate projections being made by its policy-setting members. The markets could react with outsized moves or take the projections in stride and greet them with a yawn as most figures that could be tendered are presumably already ‘baked’ into current value levels in various key assets. BMO analysts said that they are not looking for additional Fed asset (bond) purchases due to the improved manufacturing and labor market metrics being seen in the US economy of late.

Spot prices opened $12 lower in gold, which was bid at $1,655 the ounce while silver lost 20 cents to open at the $31.85 level. The gold market play of the day was still Fed-dominated. Analysts at Standard Bank (SA) noted this morning that “some anxiety has crept into the minds of some investors due to recent economic data flow that has shown a strengthening US economy. Some fear that this might alter the Fed’s long-term view and prompt a reigning in of monetary policy, earlier than originally expected.

Therefore, if today’s view on the Fed funds rate appears more hawkish than what markets are currently expecting, we could see gold, as well as the other commodities, lose some ground. This would be the case if Fed members see a rate hike happening earlier than 2014.”

Meanwhile, would-be buyers in China were still celebrating the arrival of the Lunar New Year, whilst those in India were sidelined amid expectations of a larger-scale decline in prices (target prices being cited in the neighborhood of 27.000 rupees for gold and 52.000 rupees for silver by locals). Others, however, expect a more significant, structural shift to possibly occur in gold after the middle of this year and going forward for an as yet unknown period of time.

Global investment offtake in gold is projected to decline by some 250 tonnes in the first half of 2012 notwithstanding decent odds of a final push to higher price levels, even potentially record ones. Platinum dropped $4 to start the midweek session off at $1,542 and palladium fell $2 to the $672 mark per troy ounce. The gold-platinum differential was approaching $100 in a continued narrowing. Rhodium remained unchanged at the $1,400 per ounce bid quote.

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