Last Updated : 21 December 2012 at 11:40 IST
Is it the end of road for Gold? No
Source :Commodity Online Editorial Desk
Author :Rakesh Neelakandan
It is not that time is ripe for an elegy to be written for gold. Gold's downside risks are limited as long as Eurozone crisis prevails, and given the nature of things there, the crisis remains intractable.
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By Rakesh Neelakandan
Finally the edifice of gold erected on the foundations of excessive speculation and alleged negative manipulation is razing to ground, one may think at this moment. While there is truth in this argument, it is not that time is ripe for an elegy to be written for gold. Gold's downside risks are limited as long as Eurozone crisis prevails, and given the nature of things there, the crisis remains intractable.
Gold has primarily come down from its highs due to the following factors:
--The prevailing uncertainty pertaining to fiscal cliff
--US GDP that has grown at an annual rate of 3.1% in the third quarter
The fiscal cliff issue took an interesting turn when Republican Speaker John Boehner decided not to bring to the House his so-called Plan B as he could not find enough of support amongst his party pals for favorable votes. The proposed bill envisaged tax hikes for the elite million dollar earners of fortune. White House had actually rejected this plan and instead stuck to its original plan of taxing households that earned $4,00,000 per year. Earlier the Obama ceiling was fixed at $2,50,000. The Plan B was rejected in earnest terms by President insofar as he threatened to invoke veto.
Now, with the Plan B off the table, chances are more that Boehner may opt for a tango with Obama, however, there could still be surprises.
Now, the US President is hoping to avert going off the cliff through a bipartisan solution: “The President will work with Congress to get this done and we are hopeful that we will be able to find a bipartisan solution quickly that protects the middle-class and our economy,” the White House said in a statement.
When uncertainty touches stratospheric levels, it is in the blood of investors to rush to the safety of bonds. Positions in gold were liquidated and dollar denominated Treasuries were possibly demanded more.
US GDP has grown at an annual rate of 3.1% in the third quarter. Said Tanweer Akram, ING Investment Management said to The Telegraph:
“Jobless claims have shown a trend of slow declines as the labor market gradually heals. We see some signs of improvement in the labor market and that's likely to continue as housing gradually recovers and as firms slowly start to hire.” The Quantitative Easing measures floated by US Federal Reserve is tethered to job market recovery in US.
But he added:
“The pace of hiring is still disappointing with firms concerned about the impact of the fiscal cliff on demand. Our view is that the unemployment rate will remain well above 7 percent through the coming year and well above the Fed's numerical target of 6.5pc.”
“The current data portrays a U-turn for the US economy as a whole, but it is expected that the progress would be slow.” said Martin Patrick, an economist from India. “It seems the economy has escaped from big troubles.” he added.
And often, what is good for US economy is good for Dollar and bad for gold.
“December lull is also a case in point.” he added. Investors, when they reach the year-end in December, often liquidate their positions, he added. Holidays ensure that a chunk of them stay away from the markets as well.
The Eurozone crisis
Meanwhile S&P increased Greece's rating from "selective default" to "B-minus".
"The upgrade reflects our view of the strong determination of European Economic and Monetary Union (eurozone) member states to preserve Greek membership in the eurozone. The outlook on the long-term rating is stable, balancing our view of the government's commitment to a fiscal and structural adjustment against the economic and political challenges of doing so." the agency said in a statement.
“This is a significant upgrade, which the Greek government will consider a vote of confidence, but it seems to be more of a vote of confidence in the euro in general.” said Stephanie Flanders, BBC's Economics Editor.
But Greece is not Europe and Europe is not Greece. Until the uncertainties and risk perceptions prevail Gold still has a long way ahead of it. (email@example.com)
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