Gold finds support from Fed, German buying, Japanese election

After falling 0.35% last week, the U.S. Comex gold futures fell another 0.51% week-to-date. The gold futures shot up from $1,711.57 on Wednesday open to $1,725.00 immediately after the FOMC decision. However, the gold price fell 1.23% on Thursday, touching a low of $1,690.70. The S&P 500 Index and the Euro Stoxx 50 Index also fell 0.63% and 0.10% respectively on Thursday.

New Tools from the Fed

As expected, the U.S. Fed will buy $45 billion of longer-term Treasuries per month next year in addition to the $40 billion mortgages. However, for the first time, the Fed links its interest-rate policy to an unemployment threshold of 6.5% and an inflation threshold of 2.5%. Fed Chairman Ben Bernanke expects the lower unemployment rate can be reached in 2015. On Thursday, gold prices sold off because of funds' liquidations and the concern that the future stimulus from the Fed will be limited. As the fiscal negotiations will likely drag on until the last minute, some traders predict that the investors will sell risky assets and bid up the U.S. dollar.

European News and the Germans' Gold Holdings

In Europe, the finance ministers finally agreed to release the funds of €49.1 billion to Greece. They also agreed to make the ECB the head of the bank supervision for the EU-17 countries by Q1 2014. An "economic union" will likely take shape in the next 5 to 10 years. However, the EU leaders will defer any important decisions on closer fiscal and economic integration until June. There are no details when the European Stability Mechanism will recapitalize banks. The continued EU uncertainty will likely prompt the European citizens to fetch more gold. A recent study revealed that the Germans have been buying up gold at a faster pace. An average German owns around €6,000 worth of gold. Adding the central bank's gold holdings, Germany now holds about 7% of the world's gold.

Japanese Election Next Week

Besides the looming U.S. fiscal cliff, the Dec. 16 Japanese general election will be an important event to watch. Abe from the LDP is projected to win the election. His aggressive monetary and fiscal policies to revise a depressed economy will further support the case for gold. The recently-released Japanese Tankan Survey shows that the business confidence has reached a three-year low. Other events to watch include the U.S. Q3 GDP, the Bank of Japan interest rates decision, and the Eurozone December consumer confidence number on Dec. 20.

About the Author
Austin Kiddle

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

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