Gold and Silver Drift Between Small Gains and Losses Ahead of the Christmas Holidays

President Barack Obama made a new budget offer that would raise taxes by USD1.2 tn and increase tax rates for households earning more than USD400, 000 a year, up from USD250, 000.Obama’s plan would cut USD1.22 tn in federal spending, including interest savings. House Speaker Boehner and the President meet and phoned several times yesterday, showing signs of serious negotiations and rumors were that the two were making headway easing investor fears. Positive news from Washington helped the US Dollar gain this morning.

Gold climbed from a one-week low, gaining with other commodities including oil on optimism that U.S. lawmakers will reach agreement on the budget. Silver rose from the lowest in more than a month. Silver too rose 0.54%. Gold saw very little volume and continues to trade in a very tight range, almost flat. Gold closed higher, recovering from early losses, supported by a downbeat report about manufacturing activity in the New York region, but the precious metal still remained below the key $1,700 per ounce mark.

Holdings in the SPDR Gold Trust, the world’s largest gold-backed exchange traded fund, stood at 1350.52 tons by Dec 17, down by 0.90 tons from the previous business day. While holdings in the world’s largest silver backed exchange-traded fund iShares Silver Trust stood at 9871.29 tons by Dec 17, remains unchanged from the previous business day.

Hedge funds cut bullish commodity bets by the most in a month as the Federal Reserve warned the US budget impasse may damage the economy and on worries about tax changes and their implications to capital gains and profits. Many investors are dumping trades ahead of year end as tax changes remain an unknown.

There was little in the way of fundamental data to support gold, eurozone exports jumped in October while wages grew moderately in the third quarter, the latest signs that the indebted bloc is regaining its competitive edge. Greece, Spain and Portugal, which have been at the center of the bloc’s 3-year crisis, all have cut their trade deficits by wide margins in the Jan-Sept. period and Italy have swung to a slight surplus compared to a year ago.

Last week the prices of gold and silver continued to downtrend. The concerns regarding the fiscal cliff is one of the main reasons that FOMC decided to expand QE3 by purchasing long term treasuries securities at a pace of $45 billion per month starting January. Even with the US fiscal cliff just days away and a last minute deal is a sure thing which will be temporary solution, still the tax implications are making traders uneasy to build their positions in the market. Many of them are selling even their profitable trades ahead of year end to avoid unknown tax changes, thus volatility and short term selling pressure is incising in the market. Besides that, several reports which were published during last week also affect adversely on the precious metals. These reports include, U.S PPI fell by 0.8% mainly due to the decline in energy rates; the U.S jobless claims declined again by 29k to reach 343k; finally, the CPI also fell by 0.3%.

There is little data due this week, as market volume should continue to decline ahead of the Christmas holidays as traders will be off for several days, with many leaving on Friday and not returning until the following Thursday with Boxing after Christmas. Many other traders will be combing the midweek holiday into a seasonal vacation. Markets are looking at just 2-3 more serious trading days while booking year end profits.