What next for Gold prices: 2 Guiding factors


gsr-01The Republican controlled House of Representatives is about to vote on February 12 on raising the debt ceiling of the United States of America. Coupled, although not related to each other, comes the testimony of Janet Yellen to the US Congress; Yellen is the Governor of the central bank of US, the Federal Reserve and she is about to deliver her first testimony to the US Congress on February 12, Wednesday and February 13. Both these events have significant bearing on the trajectory of gold prices.

The US Federal Reserve, as of now has tapered the Quantitative Easing measures, the monthly purchasing of bond and mortgage backed securities, to $65 billion down from $85 billion adopted last year to keep the economy afloat. This have had significant impact on the price of gold given that tapering in itself strengthened the USD and shrunk the gold prices.

The million dollar question is whether the US Federal Reserve would continue to taper in March thereby denting gold prices further.

Says Barclays in a report, “Our economists still believe moderate job growth will continue and that the Fed will continue to taper its asset purchases, but admit that the mixed employment picture does raise the likelihood that the Fed may not taper in March, yet a wealth of data releases should paint a clearer picture between now and then. However, in such a scenario, further downside surprises in employment numbers and a delay in tapering would aid gold prices.”

The tone of Barclays is positive regarding gold prices. It has to be noted that US nonfarm payrolls in January expanded by just 133k, versus expectations of 175k. This invariably means that the economy, although recovering, is not away from doldrums which it bypassed adopting measures and adapting to circumstances.

“While we do not expect any major deviations from the Fed’s articulated views [on policy], her [Yellen’s] interpretation of the recent softening in US data will be an important driver for markets, and ultimately the near-term outlook for the USD. The extent to which she (and also the committee) views the recent softness to be driven by weather-related effects, will give market participants a crucial insight into the Fed’s near-term outlook.” Barclays said.

Yet another issue pertains to the debt ceiling debate: a debate that is refusing to die down. The US Congress—comprising of House and Senate– in December had approved of the $1.01 trillion budget deal. Now that the Congress has already approved of it, the question of raising the debt ceiling becomes irrelevant given that the Congress having already approved of the budget is acutely responsible to abide by it.

“They’ve just voted for spending money,” Stanley Hoyer, a Democrat in the Senate said to Bloomberg. “Now they’ve got to pay for it,” he stressed.

Meanwhile, the Republicans are about to vote on February 12 on raising the debt ceiling although they may try to eke out solutions to other issues of their interest holding the debt ceiling to ransom.

US Treasury Secretary Jack Lew has already confided that the debt ceiling which has been raised recently is inadequate as of February 7 and that he has resorted to ‘extraordinary measures’—prioritising and channelizing of money –in meeting the commitments of the US government.

“Because Congress has not acted to approve normal borrowing authority, Treasury must begin implementing extraordinary measures that enable us, on a temporary basis, to protect the full faith and credit of the United States and to continue paying the nation’s bills,” he said in a recent letter to the Republicans.

While a default by the US government is highly unlikely given that the consequences of not raising the debt limit would be at the very least, catastrophic for the global economy, reports give out the impression that a number of Republicans are unwilling to raise the debt ceiling under any circumstances, and to muddle through, the House may thus require support from the Democrats to get the vote passed.

The actions should not be delayed because, the US Congress is about to take a recess on Feb. 17 for a full week. Jack Lew, the Treasury Secretary has clarified in no uncertain terms that the Treasury will run out of money by the end of the month.
Source: Commodity Online