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| English: Crystaline Gold (Photo credit: Wikipedia) |
Gold ETFs like SPDR Gold Shares (NYSE:GLD) were also sharply lower (down 1.20 percent); silver ETFs like ISHARES SILVER TRUST (NYSE:SLV) followed through in sympathy (down 1.36 percent)
Are these corrections a signal for a bigger correction?
It depends on the time frame of this question — and assumptions made about the ways the fiscal cliff will be addressed, and the future state of the world economy.
In the short-term, gold and silver are expected to continue their correction for four reasons:
First, tax-related sales, as investors who have been on the long side of the market for the last three years rush to cash in their chips to benefit for the low tax rates still in effect.
Second, European sovereign debt risks seem to be evaporating for the time being, as the EU and the ECB seem to have things under control.
Third, an improving employment situation in the US make it less likely that the FED will launch another round of Quantitative Easing (QE)—the primary fuel of the recent gold rallies. Besides, Fed’s QE impact on the dollar and the metals has been increasingly neutralized by ECB’s QE.
Forth, anxiety over Abe’s promise to print yen until it creates 2 percent inflation in the land of the rising sun.
In the long-term, things are unclear. The direction of metal prices depends on the different scenarios about how the US Congress addresses the fiscal cliff.
One scenario, for instance, is to go over the cliff, which would be bearish for gold, as the US economy slides into recession. Another scenario is to avoid the cliff by renewing the Bush fiscal package, which would be bullish for gold and silver.
The long-term direction of gold prices will also be determined by the direction of the world economy. A strong rebound in the world economy would be bullish for the metals, especially if it is accompanied by inflation— though such a scenario is very unlikely.
A weak rebound, or even a prolonged stagnation—a very likely scenario — would be bearish for the metals.
Bottom line: The best days may be behind for the precious metals, at least until the next crisis, provided that central bankers still have enough ammunition to fuel another rally. ... Continue to read.
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