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Debbie Carlson

METALS OUTLOOK: Syria, Fed Will Influence Gold Next Week

By Debbie Carlson of Kitco News
Friday September 6, 2013 2:21 PM

(Kitco News) - Two factors will affect the gold market next week: the debate over what the Federal Reserve might do with its bond-buying program, and the debate Congress has regarding a possible military strike at Syria.

December gold futures rose Friday, settling at $1,386.50 an ounce on the Comex division of the New York Mercantile Exchange, but down 0.69% on the week. December silver rose Friday, settling at $23.891 an ounce, up 1.6% on the week.

In the Kitco News Gold Survey, out of 36 participants, 20 responded this week. Of those 20 participants, 13 see prices up, while six see prices down and one is neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

Gold prices started Friday’s North American session weaker, but reversed course following a lower-than-expected U.S. nonfarm payrolls report. The U.S. Bureau of Labor Statistics said that 169,000 jobs were created in August and the unemployment rate fell one basis point to 7.3%. That’s under the 170,000 to 180,000 expected, but the drop in the unemployment rate came for the wrong reason; people were leaving the work force, not getting new jobs, analysts said. The labor force participation rate fell to 63.2%, the lowest level since the summer of 1978. Also, the Labor Department lowered the jobs figures for July and June, another negative sign for the labor market.

Gold rallied about $10 to $15 immediately after the data was released, helped by a drop in U.S. Treasury yields and the U.S. dollar. Afshin Nabavi, head of trading at MKS (Switzerland), said the data “took some (selling) pressure off precious” metals and now many gold traders are thinking that the Federal Reserve may not taper its bond-buying program, known as quantitative easing.

Robin Bhar, head of metals research at Societe Generale, said before the jobs report he was convinced gold was going to go down because of improving U.S. economic data, but he said with the new report, his views on gold’s short-term direction changed.

Gold prices could rise next week as market participants reconsider their views on Fed tapering, and Bhar noted there are some other factors underpinning gold, including decent physical demand in Asia and the likelihood of more Indian purchases ahead of the holidays there.

The gold market has another week and half to mull what the Fed might do, as the Federal Open Market Committee meeting is Sept. 17-18, and there’s a debate over whether or not this one piece of data was enough to change the Fed’s reason to cut its quantitative easing program.

Analysts in the “no-taper” crowd pointed to the Fed’s mandate to keep unemployment low. With a poor August jobs report and the revisions to the previous months, it’s the excuse the Fed needs to keep buying bonds and keep the ultra-loose monetary policy, supporting gold.

There are many who believe the Fed would be acting prematurely if it decided to announce a tapering at the next meeting, said Phil Flynn, senior market analyst at the Price Futures Group, and not just in the U.S.

“While most people thought that Syria was going to be the biggest thing to come out of the G-20 for futures (markets), the impact of tapering on the emerging markets really was the hot subject…. Russia not only is signaling to the U.S. not to attack Syria, but to also be careful with that taper thing,” he said.

Others disagreed that the jobs report changed everything for the Fed’s program.

“The nonfarm payrolls are just one data point. We’ve had a set of economic reports in the U.S. that were stronger: the second quarter GDP, the ISM and the non-manufacturing ISM reports, for instance,” Bhar said.

Bhar explained while he expects prices could rise next week, he would treat any rallies as selling opportunities in the medium-term.

While some gold market participants may rethink what action the Fed might take at the FOMC meeting based on the jobs report, ultimately, Bhar said, the Fed is still on the path of tapering because of the other, stronger data. Even if the Fed holds off announcing tapering at its meeting in two weeks, it may be announced at a later date and that’s going to be bearish for gold longer-term, he added.

Another factor for gold is a potential military strike on Syria by the U.S., following reports that the government there allegedly used chemical weapons against its citizens. Gold traders are watching the Syrian conflict, but so far the saber-rattling has done little to impact markets. Several analysts said going into next week that Syria might take on added significance and the conflict will likely at least add support to prices.

On Friday, Russian President Putin said Russia would “assist” Syria if Syria was attacked, continuing to keep tensions high. Congress returns from summer vacation next week and will likely take up a vote on whether to engage in a military offensive. (For more on Syria and markets, click here). Obama said he will speak Tuesday on why he is seeking military action in Syria.

“Syria is keeping some support in the market, keeping us from breaking, even though this market feels heavy. You can’t predict what’s going to happen there, so for now it’s giving us a floor,” said one Canadian bullion trader.

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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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