Gold and Silver Are Perched on a High Wire

By FX Empire Analyst - Barry Norman
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This morning bullion is trading a bit higher and as expected, prices almost touched $1750 during the US session yesterday before Libya outrage and killing rattled markets. U.S. COMEX December futures settled down $1.20 at $1,733.70 an ounce, with volume heavier than usual, about 25 percent above its 30-day average.

Asian stocks this morning have also risen for the sixth straight session amid speculation for the Fed stimulus. Moving forward gold is likely to stay strong on anticipation of Fed stimulus which has also weighed down the dollar to trade near its four months low. The Fed is projected to announce a third round of asset purchase, dubbed as quantitative easing.

The euro got a firm foot against the greenback after a German court backed the eurozone rescue fund. So, with expectation of QE weighing on the dollar, gold is likely to bid high.

Gold futures rallied to a fresh 6-month high on Wednesday, following a German court ruling that affirmed an EU bailout plan. However, prices later declined, amid growing expectations for fresh monetary measures from the US.

Gold holdings  of SPDR gold trust, the largest ETF backed by the precious metal, declined to 1,289.42 tons, as on Sept 12. Silver holdings of iShares silver trust, the largest ETF backed by the metal, declined to 9,791.49 tons, as on Sept 12.

Traders need to be cautious as there are arguments favoring no QE-3 or just a small stimulus package. For example, the GDD to debt ratio has soared above 100% and fattened the US balance sheet over $3trillion, with the debt amount approaching the ceiling of $16.39 trillion. Moreover, with the November election at the edge and talks of a bipartisan deal to reduce fiscal deficit, QE-3 would be at diminishing return for Fed.

Amid this fiscal cliff the Fed may not be so aggressive like ECB. If so happens, market distress may lead gold for a correction. The question remains what if this is to happen. What if markets are disappointed by their expectations, which could easily happen?

Silver futures prices this morning have taken tiny correction ahead of the mostly eyed FOMC meeting although industrial metals and precious metals remain strong. With the surge in prices there seems to be some profit taking ahead of the Fed statement. Expect silver to recover the paltry loss on the back of strong Asian equities and on anticipation of Fed announcing third round of asset purchase.  However, as discussed in gold’s outlook, there is also high probability of Fed refraining from easing. Market therefore may correct during the evening hours. QE3 would be at diminishing return for Fed. If this does happens, market distress may lead silver for a correction with high volatility and over action and reaction, but expect silver to stay firm till the US opens after which market correction is expected given any devoid of Fed easing.

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