Wednesday, 2 October 2013

The Daily Market Report

Gold Pops Despite Persistent Threat of Taper

Gold jumped in early New York trading, establishing a new high for the week at 1344.02,
despite new mixed signals on the Fed taper. Meanwhile, safe-haven interest may be picking up as the deadline for a budget deal is fast approaching.

Chicago Fed dove Evans, speaking in Oslo Norway, said that the taper may be pushed back into 2014. In the wake of the Fed’s ‘no taper’ decision a couple weeks ago, I think this is a broadly accepted expectation. It’s probably still wrong, but given the economic realities, there are many that now think taper is off the table until next year.

Yet, Evans saw fit to toss in that there is still a “decent chance” that the Fed could taper in October or December. At least the gold market was quick to dismiss that 9 (remote) possibility.

However, stocks are under pressure amid persistent rumblings of taper and the looming fiscal crises, which could lead to a government shutdown and a technical default of the U.S. government. It is perhaps the developing downside risks in equities that is counter-intuitively tempering the safe-haven interest in gold.

Looking back at past crises, as stocks rotate lower, gold can sell-off at least initially in sympathy as a result of broad-based deleveraging pressures. I believe it is the risk of this pattern repeating that has injected a level of caution into the safe-haven investors.

Trust your instincts on this though. Physical gold is still the safest of the safe-havens as it is one of the few asset classes that doesn’t create a corresponding liability. As such, if your buy physical gold and take delivery, there is no counter-party risk. Ideally you want to have your haven in place before the storm clouds are overhead. Don’t try and pick the bottom.

Deleveraging in gold is invariable driven by the paper market, but as paper selling drives the price down, the physical buyers emerge to snap up real metal at lower prices. We’ve seen this pattern repeat time and time again.

Our most prudent and thoughtful clients tend to build their core positions in gold in periods of relative market calm. If a crisis materializes and gold prices rise, they are well positioned to ride out the storm. If on the other hand the first phase of the crisis results in a deleveraging retreat in gold, positions in the yellow metal can be bolstered, improving one’s average price.

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