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Debbie Carlson

METALS OUTLOOK: Gold Market Eyes Washington For Direction

By Debbie Carlson of Kitco News
Friday October 11, 2013 2:15 PM

(Kitco News) - Thursday is the U.S. debt-ceiling deadline, and gold-market participants will focus squarely on whether or not Republicans and President Barack Obama can come to an agreement to lift the ceiling.

Gold and other markets were hamstrung this week over the continued political wrangling in Washington over the U.S. government shutdown and the debt ceiling, and this will persist into next week, market watchers said. Thursday is the date when the Treasury has said it will run out of borrowing authority, which could mean it may default on some payments.

Sentiment toward gold was negative this week, with some banks like Goldman Sachs and Morgan Stanley giving bearish views on gold’s outlook. Some bullish market participants were surprised gold did not rally on the lack of agreement in Washington.

Several gold market watchers said until something is worked out, they are sitting on the sidelines to avoid being caught in a volatile price move, while others said they expect this week’s weakness to continue, especially after Friday’s sell-off.

December gold futures fell Friday, settling at $1,268.20 an ounce on the Comex division of the New York Mercantile Exchange, and fell 3.2% on the week. December silver fell Friday, settling at $21.259 an ounce, down 2.3% on the week. 

The U.S. Treasury market is closed Monday for Columbus Day, and Canada is closed for Thanksgiving Day.

In the Kitco News Gold Survey, out of 34 participants, 26 responded this week. Of these, four see prices up, while 18 see prices down and four see prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.

Sterling Smith, futures specialist, commodity research, Citibank Institutional Client Group, said he’s “bearish, bearish, bearish” on the metal. He said gold’s direction next week will depend on what happens in Washington. If there’s an agreement to lift the debt ceiling beyond the six-week period offered by Republicans on Thursday, then gold prices could rally as bargain hunters come in, he said.

But if there’s no agreement, or if the six-week deal is agreed upon, “it just kicks the can down the road. That takes us to just about Thanksgiving and right before the holiday spending period for Christmas,” he said, adding that it could hurt the economy as people might not spend as much money.

Jordan Eliseo, chief economist at ABC Bullion in Sydney, said he’s neutral on gold prices for next week. The negotiations in Washington are affecting markets as a whole so for now he would step aside all asset markets until an agreement is reached.

Equity prices rallied sharply on Thursday on hopes of a breakthrough on the stalemate in Washington, erasing the weakness the benchmark Standard & Poor’s 500 built in earlier in the week when talks seemed to go nowhere. Gold prices had a steady-weak tone ahead of Friday’s fall.

Several analysts said they were surprised at gold’s lackluster reaction to the Washington squabbles, which doesn’t bode well for the metal if talks deteriorate.

Still, analysts at Nomura said the odds favor some agreement before the debt ceiling is reached, given that Republicans’ proposal is a “step toward a resolution of the current impasse.” However, Nomura added that “the issues that divide the two sides are still substantial.”

Discussions will occur throughout the weekend, although the firm is doubtful that a solution will be in place before early next week. “However, we now appear to moving toward a solution, inch by inch. The likelihood of testing the debt limit deadline next week has fallen…. We assign a 70% likelihood of a U.S. fiscal deal before the Oct. 17 deadline, when Treasury cash-flow management becomes less predictable,” they said.

Eliseo said the short-term sentiment in gold is negative, which hampers any rallies, and pointed to comments about gold this week by Goldman Sachs as an example.

“Goldman Sachs’ comment that gold is a ‘slam dunk sell’ is really extraordinary, to see any investment bank say to sell an asset. They don’t say that too often,” he said.

Frank Lesh, broker and futures analyst with FuturePath Trading, concurred sentiment toward gold is bearish, noting the continued outflows from gold-backed exchanged traded funds.

“ETFs continue to see liquidation into the rallies as no one believes gold will be profitable as an asset any time soon. It will take a lot more than the ‘insurance’ buyers - those who commit 5% of their portfolio to gold - … to take this market higher. Gold is also a commodity and commodities are deflating right now,” he said.

Eliseo said longer term the case for holding gold remains for its traditional reasons, adding: “I don’t know what’s been a better store of wealth over time.”  

Gold’s technical charts “look ugly,” said Charles Nedoss, senior market strategist with Kingsview Financial. Both Nedoss and Smith said first technical support for gold rests at $1,250 for the December futures, which they said is important more from a psychological perspective since it’s a round number.

“I wouldn’t be surprised to see some stops hit if we break $1,250,” Nedoss said, referring to pre-placed sell orders.

A break of that takes December gold to the $1,215 to $1,200 area, they 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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