Market Overview

Gold Surges Higher as U.S. Dollar Softens

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On Tuesday, gold futures rallied over $30 an ounce to the highest levels since November 20, while the U.S. Dollar Index weakened to six week lows.

The Euro advanced against the U.S. dollar for a sixth consecutive day, aided by rising anticipation of a deal that would create a banking union with powers to close down failing eurozone banks.

Gold Strength

The appeal of gold and other commodities was enhanced as an alternative investment amid recent weakness in the U.S. dollar. The gold market may have also priced in a modest tapering of Fed bond purchases, with speculation growing that the Fed is unlikely to make substantial cuts to the program in the near term. Analysts have also suggested that the gold rally of recent days is in part attributed to the covering of large short positions.

December FOMC Meeting

The FOMC meeting is scheduled for next week on December 17-18. Accommodative monetary policy from the Fed has boosted gold's appeal as a hedge against inflation. However, gold has lost over a quarter of it's value in 2013 amid fears of a tapering of stimulus.

Bullard and Fisher Comments

While Federal Reserve Bank of St. Louis President James Bullard said an improving labor market has increased the chances of a reduction in the Fed’s bond purchases he also stated that the cut could be modest due to low levels of inflation.

Bullard said yesterday in a speech to the CFA Society of St. Louis, “A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014.”

He added “Should inflation not return toward target, the committee could pause tapering at subsequent meetings.”

Speaking to reporters after his speech, Bullard said “If you did taper here in December, it would acknowledge that labor market data has been stronger than expected.”

Meanwhile, the more hawkish Dallas Fed President Richard Fisher said yesterday in a speech in Chicago, “We at the Fed should begin tapering back our bond purchases at the earliest opportunity.”
Gold Yearly Losses

Bullion reached a record high of $1,923 an ounce in 2011 as central banks collectively engaged in dovish fiscal policy. However, since then the price of gold has fallen sharply, losing over 25 percent in 2013 and potentially heading to the first annual loss since 2000.

COMEX Gold Futures Daily Chart

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Posted-In: CFA Society Federal Reserve James Bullard Richard FisherCommodities Economics Federal Reserve Markets Best of Benzinga

 

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