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Debbie Carlson

METALS OUTLOOK: German Elections, U.S. Political Wrangling To Set Tone For Gold Next Week

By Debbie Carlson of Kitco News
Friday September 20, 2013 2:05 PM

(Kitco News) - German elections and debate over a possible U.S. government shutdown and raising the debt ceiling will set the tone for gold next week.

December gold futures fell Friday, settling at $1,332.50 an ounce on the Comex division of the New York Mercantile Exchange, but rose 1.8% on the week. December silver fell Friday, settling at $21.927 an ounce, bur rose 0.9% on the week. 

In the Kitco News Gold Survey, out of 36 participants, 19 responded this week. Of those 19 participants, nine see prices up, while eight see prices down and two are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

Prices rose this week, spurred by the news that the Federal Open Market Committee left its bond-buying program intact. For now, the Fed will still buy $85 billion in Treasury and mortgage-backed bonds each month. Stock and commodity markets, including gold, rose on the news, while the U.S. dollar fell.

Gold prices rallied, but by Friday gave up a lot of the gains. Veteran market watchers cautioned reading too much into this week’s rally. Several noted that open interest in the futures market fell as prices stormed higher Thursday, a sign that market participants were buying back previously sold positions, known as short covering, rather than establishing new trades.

Total open interest went fell to 380,978 contracts, down from 383,891contracts held prior to the Fed meeting. Traders said it’s important to watch Monday what the open interest tally was for Friday’s session. If open interest falls again, it’s a sign that traders were closing out bullish positions, known as liquidation. If open interest rises, it could mean that traders established new short, or bearish positions as prices fell.

Now that the FOMC meeting is over, market participants’ attention is focused on a few key events. Most immediately is the Sunday election in Germany, where Angela Merkel is expected to win a third term as chancellor. News reports say that Merkel’s party, the Christian Democratic Union, will receive the most votes; however, German elections are designed for collations, so there might be a question of which other group Merkel’s party will ally with.

Gold traders said if Merkel wins there should be little impact on the markets. Currency watchers said the election also should have little impact on German policy toward the euro area.

“The German election is important because with the passing of that event, European issues can return to the fore.  These include, the German Constitutional Court ruling, the fragility of the Italian government, the Greek funding gap, next year's planned exit from aid packages by Portugal and Ireland, and Slovenia's potential need for assistance to address it fragile banks,” said Brown Brothers Harriman. 

Also important for gold will be the squabbles in Washington over the potential U.S. government shutdown and fight over the debt ceiling.

House Republicans are sparring with President Obama, and Friday they approved a short-term government funding bill that includes a provision to defund “Obamacare,” the new health law. The House bill won’t be approved by the Senate and Obama, and if they can’t work out a compromise, the U.S. government shutdown could happen on Oct. 1.

Beyond that is the fight on raising the debt ceiling, which will likely mean another showdown. Most market watchers said they don’t expect a similar outcome as in 2011, when this last happened. At that time gold prices rallied to all-time nominal highs and credit rating agency Standard & Poor’s downgraded the U.S. debt rating.

Some market watchers suggested the political infighting is one reason why the Fed was hesitant to curb some of its stimulus program.

“The Fed is also concerned about the President and Congress being able to work out upcoming fiscal issues (such as) raising the debt ceiling, agreeing on a budget or passing a continuing resolution, so they have a ‘wait-and-see’ strategy until those issues are resolved one way or another and how the resolutions might impact the economy,” said Edmund Moy, chief strategist with gold-backed IRA provider Morgan Gold, and a former director of the U.S. Mint.

"Gold and silver prices will continue to be volatile through this period of uncertainty. What is certain is that eventually, there will be an agreement to raise the debt ceiling. Because the price of gold has correlated best with the debt ceiling ever since the start of QE, expect that gold prices will have room to rise, though not in a straight line," Moy said.

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By Debbie Carlson dcarlson@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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