Saturday, October 5, 2013

U.S. Political Stalemate Remains Focus For Gold Market; FOMC Minutes On Tap...

Barring a weekend political agreement, the gold market will remain focused on the partial U.S. government shutdown and political quagmire next week, analysts said.
Several said this should be more supportive for gold now that the dispute has turned into a several-day affair, as opposed to some standoffs in the past that were resolved at the last minute before a major deadline.

The current shutdown in the U.S. is the result of a lack of agreement over a continuing resolution on the budget, which led to a shutdown of so-called non-essential services on Tuesday, analysts said. Further, the market is starting to look ahead toward the Oct. 17 date by which the Treasury has said it will hit its borrowing authority, meaning another potential political fight over the debt ceiling.

Other factors that could influence the market next week include minutes of the last meeting of the Federal Open Market Committee and the return of Chinese buyers after a week-long holiday.
This week, gold eased despite the partial U.S. government shutdown. The December contract lost $29.30 for the week, or 2.2%, to settle Friday at $1,309.90 an ounce on the Comex division of the New York Mercantile Exchange. December silver slipped 7.9 cents to $21.752.

Some market participants were puzzled that gold couldn’t tick higher despite the U.S. shutdown. Traders offered several theories. Sean Lusk, director of commercial hedging with Walsh Trading, pointed to the absence of Chinese buying since that country was observing an extended holiday, temporarily taking away one of the world’s two largest physical buyers of the metal. And, he continued, recent downgrades of gold outlooks by investment banks may have dented some investor enthusiasm.

Others said gold prices may have already factored in the shutdown prior to this week, while others still suggested veteran traders may have viewed the political battle as largely posturing for lawmakers’ constituencies, expecting them to eventually allow the government to re-open.

Whatever the case, many anticipate the metal will get a lift if the political stalemate and U.S. government shutdown goes into a second week. Of 21 respondents in the weekly News Gold Survey, 10 see prices up next week, while six see prices down and five see prices sideways or unchanged.

With the government already shut down, the approaching debt-ceiling deadline adds another concern for investors since there will be worries that credit agencies could downgrade U.S. debt, Lusk said. Standard & Poor’s did so during the last major battle over the debt ceiling back in 2011.
“Right now, we’re just trading off of chart points here – support and resistance – because there is nothing else to really trade off,” Lusk said, citing the dearth of U.S. economic data since agencies such as the Labor Department are not releasing reports during the shutdown.

“But as we get into next week and this thing extends, and there is no deal today or over the weekend, I feel we’re going to trade higher. We will get some temporary safe-haven buying.”
Spencer Patton, chief investment officer for Steel Vine Investments, concurred. Conversely, both men would envision gold retreating if Republicans and Democrats suddenly found a middle ground and struck a compromise.

“If there is no resolution, I expect that to be bullish for gold,” Patton said. “If there is a resolution, I expect that would be bearish for gold since that would take some of the uncertainty out of the market.”
Based on some of the comments coming out of the Republican camp, Patton added, he suspects that any agreements on the continuing resolution on the budget and debt ceiling may come at the same time. “But I don’t think that will happen for another two weeks,” he added.

Meanwhile, if the partial U.S. government shutdown continues, that means no more economic data from government agencies. As it was, Friday’s key monthly September report on non-farm payrolls was delayed.

Under such a scenario, there may be an increased emphasis on Wednesday’s scheduled release of minutes of the Federal Open Market Committee meeting that ended Sept. 18. A spokesman for the Federal Reserve told world News that the Fed remains open and the minutes should be released. Several analysts explained that the Fed is not considered a part of the government and does not rely upon Congress for funding.

The FOMC meeting ending Sept. 18 was the one at which policy-makers opted to leave their $85 billion-per-month bond-buying program, known as quantitative easing, in place when expectations had been for a modest tapering.

“If there is no agreement in the U.S., then I would guess the minutes of the FOMC next Wednesday should not be good for the dollar,” said Afshin Nabavi, head of trading with MKS (Switzerland) SA. This, in turn, should be supportive for gold, he continued. The yellow metal tends to move inversely to the greenback.

Lusk said it is doubtful that the FOMC members would taper at their meeting at the end of October with the government shut down, meaning furloughs of many workers, and since no more government reports are coming out to offer fresh insight into the economy. “I think the $85 billion per month is going to be kept in place,” he said.

Meanwhile, a week-long Chinese holiday will end next week, bringing potential buyers of physical metal back into the market, observers said. “That should provide some kind of support,” Nabavi said.
Technical-chart considerations also will play a role in what happens to gold, as always, several observers said.

“This week’s dip below $1,300 put a technical dent in the fundamental perspective that the financial uncertainty facing markets over a U.S. government shutdown should prompt gold to soar,” said Ralph Preston, principal with Heritage West Financial. “Gold needs to rapidly close back over the 50-day moving average at $1,343 or risks losing momentum and following back below $1,275.”

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