Is gold reasserting itself as the fear index?

The U.S. Comex gold futures bucked the trend of the broader riskier markets and surged 1% to $1,726 on Thursday. Gold futures traded further up at $1,735 during Asia open on Friday. The S&P 500 and the Euro Stoxx 50 Index fell 3.56% and 2.24%, respectively, in the past two days while the CRB Commodities index dropped 1.78%. The EUR/USD fell 0.69% this week to 1.2747 after falling 0.8% last week. Week-to-Thursday, gold has risen 3% while the VIX spot rose 5%.

Safe-haven bids for gold have re-appeared as the markets immediately turned their attention to the fiscal cliff and the European debt crises after the U.S. election uncertainty has been removed. What exactly is the fiscal cliff? It is a term first used by Ben Bernanke in his speech to the Congress in February 2012, referring to the enacted legislation causing an automatic spending cuts and tax hikes on Dec. 31, 2012 of about $7 trillion over the next 10 years and about $600 billion in 2013. What's to fear? The politics in the U.S. remains a gridlock after the election, and if no action is taken, the U.S. Congressional Budget Office expects a U.S. recession in the first half of 2013. In the two months around the time the deficit-reduction deal was signed in 2011, gold price surged around 8% while the S&P 500 index plunged about 14%.

In Europe, the ECB kept its benchmark rate at 0.75% on Thursday, though the ECB warns of lowering its economic forecast of the Eurozone next month as the economic outlook, including that of Germany, is deteriorating. Spain has still not asked for the ECB to purchase its bonds while the Euro area finance ministers will not likely make a final decision to release the €31.5 billion of aid to Greece until probably Nov. 26.

The GFMS expects that China's gold demand will rise 1% to 860 tonnes in 2012, overtaking India to become the largest gold consumer in the world. Although overall economic growth and therefore gold demand slowed in 2012 compared to 2011, gold purchases especially in jewelries in the third- and forth-tier cities in China will support overall consumption.

Upcoming data and events to watch include the Chinese October industrial production and fixed asset investment growth on Nov. 8, the Chinese October exports and imports growth on Nov. 9, the Euro area finance ministers meeting on Nov. 12 and the FOMC meeting minutes and Germany's Q3 GDP on Nov. 14.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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