Gold may be reasserting itself as the ‘fear index’, says Sharps Pixley

Precious metals trader Sharps Pixley believes the markets have once again turned risk averse in the wake of the US elections this week, and amid realisation that the US fiscal cliff remains in place.

Safe-haven bids for gold have re-appeared as the markets immediately turned their attention to the fiscal cliff and the European debt crises after the US election uncertainty has been removed.

What exactly is the fiscal cliff? It is a term first used by Ben Bernanke in his speech to the Congress in February 2012, referring to the enacted legislation causing automatic spending cuts and tax hikes on 31 December, 2012, of about $7trn over the next 10 years and about $600 billion in 2013.

What’s to fear? Politics in the US remains in gridlock after the election, and if no action is taken, the US Congressional Budget Office expects a US recession in the first half of 2013. In the two months around the time the deficit-reduction deal was signed in 2011, the gold price surged around 8% while the S&P 500 index plunged about 14%.

In Europe, the ECB kept its benchmark rate at 0.75% on Thursday, though the ECB warns of lowering its economic forecast of the eurozone next month as the economic outlook, including that of Germany, is deteriorating. Spain has still not asked for ECB to purchase its bonds while the euro area finance ministers probably will not likely make a final decision to release the €31.5bn of aid to Greece until 26 November.

The GFMS expects that China’s gold demand will rise 1% to 860 tonnes in 2012, overtaking India to become the largest gold consumer in the world. Although overall economic growth and therefore gold demand slowed in 2012 compared to 2011, gold purchases especially in jewellery in the third and forth-tier cities in China will support overall consumption.

Upcoming data and events to watch include the Chinese October industrial production and fixed asset investment growth on 8 November, the Chinese October exports and imports growth on 9 November, the Euro area finance ministers meeting on 12 November and the FOMC meeting minutes and Germany’s Q3 GDP on 14 November.

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