Commodities | Dec 13 2010
By Ilya Spivak, Currency Strategist
Gold is poised to decline as traders continue to unwind bets linked to US quantitative easing (QE) into the calendar year-end. As we have discussed for some weeks now, financial markets have been operating against the backdrop of an underlying tendency toward risk aversion since early November when the Federal Reserve’s FOMC rate-setting committee made the official announcement of the $600 billion QE reboot. Indeed, Ben Bernanke and company delivered an expansion of the asset-buying program in line with what investors had priced in over the preceding three months since the idea of renewed QE was initially floated at the central bankers’ summit in Jackson Hole, they robbed the risk rally that had developed over that period of the impetus to continue, opening the door for profit-taking.
Strictly speaking, gold doesn’t neatly fit into the “risk” or “safety” side of the dichotomy that has ruled financial markets in the aftermath of the 2008 credit crisis and recession. Indeed, the metal has been equally sought as a store of value by those thinking the recovery will gain momentum, unleashing catastrophic QE-fueled inflation, and those thinking it will flounder, erasing paper gains build up since asset prices started to rebound in early 2009. However, the primacy of QE expectations as a driving theme in the financial markets since August put a spotlight on the metal’s allure as an inflation hedge, sending it higher along with the advance in equities and the parallel decline in US bond yields. Therefore, gold prices ought to fall as traders exit QE-linked exposure, mimicking the corrective decline in shares as well as the sharp rebound in the return on Treasuries.
The remaining themes prevalent in financial markets are likewise pointing toward risk aversion, further encouraging the profit-taking dynamic. Indeed, sovereign stress in the Euro Zone remains significant, with periphery credit-default swap (CDS) spreads soaring last week to erase month-to-date losses seen amid optimism in the wake of Irish bailout news. Meanwhile, Chinese CPI figures released after the weekly closing bell showed inflation topped 5 percent for the first time in two and half years in November, hinting authorities will need to raise rates in earnest rather than incrementally increase reserve ratios, a policy that has proven largely ineffective.
The views expressed are not FNArena's (see our disclaimer).
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