Although the markets greeted the news of the passage of the austerity measures with the enthusiasm that one might have expected, the ’celebrations’ were rather half-hearted, as reflected in the gains in various assets.
Not surprisingly, gold soared after the Federal Reserve extended its pledge to keep interest rates at “exceptionally low” levels to the end of 2014 from the previously promised mid-2013. Inflation expectations are climbing and boosting demand for precious metals.
Not surprisingly for the world’s third-most used industrial metal, copper is tracking closely with overall risk appetite trends. Over the near term, this puts the spotlight on the fourth-quarter earnings docket. The pre-open drop in S&P 500 futures hints the path of least resistance favors the downside.
Investors should reign in expectations of more stimulus being unleashed in China during the early part of 2012. Instead of speculating on Chinese stimulus programs, investors should take notice other trends in the precious metal bull market.
Gold is under pressure in European hours, with the moderation in euro-zone debt crisis fears seemingly behind the move lower. Mirroring developments with the US dollar, the yellow metal is also shedding its correlation with the S&P 500.
If oil prices were to work to the $125/barrel level and remain there for a period of time, I would anticipate a very sharp decline in the S&P 500. Currently there are a lot of headwinds for bulls, some of which could persist for quite some time.
The gold price was little changed in London on Friday, ending the short pre-Christmas session 0.6% higher from last week's finish after setting an AM Gold Fix of $1,607.50/oz. Silver prices also held flat, moving in a tight range below $29.50/oz.
Empirical evidence from both the US and the UK is clear. Gold is a store of value even during deflations. The purchasing power of gold rises because it does not go down in value to the same extent the price level declines.
Oil prices rose about 5% last week to finish only a dollar short of regaining triple-digit status. Since dipping below $80 per barrel on Oct. 3, West Texas Intermediate (WTI) prices have increased almost 28%.