Gold Could Benefit from Fiscal Cliff

Trading wrapped up early on Monday without much fanfare. The U.S. Dollar continued to post gains as investors moved away from higher risk assets into the safety of the Greenback. 

The main concern for investors remains the possibility of the U.S. fiscal cliff. With legislators breaking for the Christmas holiday, investors are expected to be left in limbo for perhaps as much as three days while the economy moves closer to facing the effects of tax hikes and spending cuts.

 Some traders feel that President Obama wants the nation to fall over the “fiscal cliff”. His reluctance to budge on tax issues regarding the wealthy is likely to mean there won’t be a timely decision which sets up the economy for a possible recession in early 2013.

If we end the year without a budget agreement in place, look for investors to flock into the U.S. Dollar at the expense of the Euro and the British Pound. This is also likely to mean increased volatility.

February gold could be the big winner if traders continue to remain unsure about the state of the global economy. Money may begin to move into gold as a hedge against the possibility of lost wealth. Its recent drop in value has also left the market in an oversold condition. This combined with relatively cheap prices could also trigger the start of a demand rally.

February crude oil could be under pressure also the remainder of the week. The threat of the fiscal cliff could be keeping buyers on the sidelines. A fiscal cliff condition could mean a global recession in early 2013. This would mean lower demand for crude oil, leading to increased supply.