Gold market report: Trading dominated by delay in resolution of the US budget and debt ceiling

This week’s trading has been dominated by the budgetary and debt limit problems faced by the United States. On Monday and Tuesday gold gradually firmed to $1330, before drifting off to a low of $1282 on Thursday evening UK time. Silver performed better, starting the week at $21.70, rising to a high of $22.45 before falling back with gold for only a small net loss as of last night.

The prices of precious metals moved in opposite directions to equities, with the Dow falling on Monday and Tuesday, and then rallying strongly on Wednesday and Thursday. The yield on short-term Treasury bills, which are at the heart of the financial system, rose sharply, and it was reported that some money-market funds were selling all their short-term bill holdings. This rise in short-term rates may have triggered some hedge fund selling of gold.

Furthermore sentiment in Western capital markets is generally bearish for gold, based on its technical performance. The price was recently unable to get through overhead supply at $1350 then failed to find support at $1320 and $1300. Bearish sentiment usually attracts negative comment, and obligingly the Indian balance of payments for September, released earlier this week, showed a marked improvement due to lower gold imports.

However, Indian customs holding up gold shipments due to new rules issued by the Reserve Bank have already been widely reported, so this is not news. What was not reported is the increase in gold smuggling, which cannot be quantified; but large-scale smuggling of gold was the reason the Indian market was liberated in the first place in the 1990s.

Meanwhile China continues to take a more liberating view, and her central bank said it plans to issue more licences to import gold in due course. As reported in last week’s Market Report, Chinese demand already absorbs all global mine production ex-China and looks set to grow further.

The partial US government shutdown has closed down aspects of market regulation, including the weekly Commitment of Traders Reports and October’s Bank Participation Report, both issued by the CTFC. Markets are therefore flying blind with respect to statistical facts, and today will be the second Friday without this information.

Finally, the appointment of Janet Yellen as the next Fed Chairman has been widely applauded as a sensible replacement. She is expected to continue to pursue Bernanke’s policies and to be more dovish, so it looks like tapering QE is not likely soon.

Next Week

A slow week announcement-wise, with all eyes focused on the budget/debt ceiling stand-off in the US. US statistics listed for Monday are postponed from last week, and will only be announced when relevant government statistical departments return to work.

Monday: Eurozone: Industrial Production. US: Non-farm Payrolls, PPI, Retail Sales, Trade Balance, Unemployment, Business Inventories, Factory Orders.

Tuesday: Japan: Capacity Utilisation, Industrial Production (final). France: CPI. UK: CPI, Input Prices, Output Prices. Eurozone: ZEW Economic Sentiment. US: Empire State Survey.

Wednesday: UK: Average Earnings, ILO Unemployment rate. Eurozone: HICP, Trade Balance. US CPI

Thursday: Eurozone: Current Account. UK: Retail Sales. US: Building Permits, Housing Starts, Initial Claims, Capacity Utilisation, Industrial Production, Philadelphia Fed Survey.

Friday: US: Leading Indicator.

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