METALS OUTLOOK: Gold Prices Could Continue To Rise Next Week 12/02/2011

02 December 2011, 2:21 p.m.
By Debbie Carlson
Of Kitco News
http://www.kitco.com/

(Kitco News) - After a strong showing this week, most market watchers expect gold to build on gains for next week, with a critical European Union summit meeting on Dec. 9 to also influence direction.

Financial markets across the board rallied this week on an early Christmas gift from the world’s central bankers when the bankers announced a liquidity injection by lowering the temporary U.S. dollar liquidity swap arrangements by 50 basis points. That will help European banks have an easier time to access dollars, which had become difficult in recent weeks. The new arrangement goes into effect Dec. 5.

The most-active February gold contract on the Comex division of the New York Mercantile Exchange settled at $1751.30, up 3.72% on the week. March silver settled at $32.686, up 5.13% on the week.

In the Kitco News Gold Survey, 32 participants, 21 responded this week. Of those 21 participants, 19 see prices up, while one sees prices down, and one sees prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts.

Many market watchers expect follow-through buying early next week to underpin markets. The liquidity injection, combined with a generally positive U.S. employment report should favor a “risk-on” market sentiment, they said.

The U.S. Bureau of Labor Statistics estimated that nonfarm payrolls increased by 120,000 in November and upwardly revised October and September payrolls. The unemployment rate also dropped to 8.6% from 9%.

“Upward revisions to the back data have become the norm and are an indication of a fundamental improvement in the U.S. economy. A general rule of thumb is that the direction of back revisions tends to follow the trend of growth in the economy,” said analysts at Nomura.

The jobs data follows other generally positive U.S. data out this week such as manufacturing reports. While the data is not anyone’s idea of stellar growth, it shows the U.S. economy is at least muddling through. The U.S. data, the central bank action and China’s reduction of its bank reserve requirement have now revived inflation talk and that also served to support gold, market watchers said.

Ira Epstein, director of the Ira Epstein division of The Linn Group, said he believes the inflation debate could be the next catalyst for higher gold prices. Wednesday’s “price action confirmed my idea that gold needs an inflation theme to move higher. (Iran’s) nuclear stance, the attack on the British embassy in Tehran, interest rates over 7% in Italy, talk of recession in the U.S. and even lowering of credit ratings did not move gold higher. In fact these items actually caused selling as investors moved into cash.

“I think it’s clear that those themes wore themselves out as props for gold. When China lowered the bank reserve ratio, commodities including gold, silver and copper jumped higher.  Why?  I think because of ‘hope’ for inflation,” Epstein said.

Next week the markets will be tuned into what comes out of European meetings.
Marc Chandler, head of global currency strategy at Brown Brothers Harriman, said there are several potentially headline-grabbing events occurring in Europe next week ahead of the critical EU summit.

On Monday, new Italian Prime Minister Mario Monti will unveil an austerity and growth package, which could embrace many of the reforms that Germany and others demanded, Chandler said.  On Wednesday, the European Central Bank will hold the first dollar auction under the new and lower rates. Also on Wednesday, the Greek parliament is expected to approve the 2012 budget cuts that are necessary to ensure that the next tranche of aid gets paid. Then there will be a meeting of conservative leaders in Europe, ahead of the Dec. 9 EU summit.  “Headline risk can be great,” he said.

On Thursday the ECB will meet, and Chandler said it’s likely they will at least cut interest rates by 25 basis points and perhaps 50 bp, with other policy action possible.

Finally, on Dec. 9, comes the EU summit, which is the main event.  Market analysts and media commentators have billed this as the ultimate decision on the life of the EU as changes to its treaty are expected to be decided. “While pressures on Germany and the ECB to do more have increased, we argue the pressure for ceding fiscal authority is also increasing.  The market talk and the media focus have been on the former, but the risk is that it shifts to the latter in the period ahead,” Chandler said.

Chandler said there is a lot of skepticism ahead of the summit, given that the numerous other summits and packages to help the euro have failed to contain the sovereign debt crisis. He said the meeting should show some broad measures taken to address what he calls the European Monetary Union’s “birth defect” a monetary union without a political union.

“One way to fix the defect is infanticide, and that is what many seem to be calling for, the disintegration of the EMU. Instead, we see occupational therapy as the more likely direction and this is establishing the scaffolding of a fiscal union,” he said.

Deutsche Bank analysts are bullish on gold and they said that if treaty changes at the EU summit allow the ECB to become more flexible, it could provide “a liquidity environment that is even more constructive to the gold price outlook.”

Edward Meir, analyst at INTL FC Stone, said he expects EU leaders will suggest a closer fiscal union, while the ECB will be “persuaded” to come in with more financial support, perhaps with International Monetary Fund help. “Another big rally (in financial markets) may therefore be in the works shortly after the meeting, but this may also prove to be short-lived should the Europeans fall victim to political wrangling and poor implementation. We shall see; December will likely not turn out to be the quiet month it usually is,” Meir said.

By Debbie Carlson of Kitco News dcarlson@kitco.com

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