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Friday’s market will bring to a close another wild week for precious metals investors.
On Monday, gold managed to eek out gains despite several members of the FOMC going on record to advocate for a December taper. St. Louis Fed President James Bullard encouraged a small December taper to acknowledge progress in the labor market, while Dallas Fed President Richard Fisher backed tapering at the earliest possible opportunity. The fact that gold managed to advance in spite of these comments suggested to many analysts that the inevitability of tapering has already been factored in to precious metals prices, and that when the Fed finally does unfurl its apron strings, the backlash to gold won’t be as significant as originally anticipated.
This theory was validated on Tuesday, when in spite of all evidence to the contrary, gold staged an impressive rally, which pushed prices to a three-week high.
In economic news, the Labor Department reported that job openings climbed in October to their highest level in more than 5 years, a sign that employers are gaining confidence in the growth of the economy. This report, on the heels of last Friday’s surprisingly good November jobs report, fueled speculation that the Fed may accelerate its timetable for tapering, with a full 1/3 of analysts polled predicting some pullback of stimulus measures at next week’s FOMC meeting. However, instead of dropping as a result of this speculation, gold prices led gains in commodities across the board, as equities, on the other hand, retreated from Monday’s record high.
Tuesday’s stock market drop was extended through Wednesday, when equities posted their largest drop in one month, as traders locked in gains following reports that a bi-partisan Congressional committee managed to draft a provisional budget deal. Gold traded moderately lower, but then losses were accelerated through Thursday’s trading, when a combination of economic data and progress on the budget agreement buoyed expectations of a December Taper.
The Commerce Department reported Thursday that retail sales jumped by 0.7% in November, underscoring a slow but steady trajectory of growth, which is exactly what the Fed is looking for as confirmation that it’s time to test the waters of tapering.
Also boding bearish for gold was speculation that the House will pass the compromise budget deal, which would extend federal spending authority into 2015, thereby averting another government shutdown. Last time the FOMC met, the looming uncertainty created by the government shutdown and budget gridlock was a primary factor that prevented the Fed from triggering a pullback on its bond-buying program. If Congress were to pass the current deal, it would remove a significant obstacle to the Fed’s taper start. Progress toward a budget deal, combined with the fact that non-farm payrolls have added more than 200,000 jobs for the past two months in a row, has increased market expectations that a December taper is on tap for next week.
As for gold prices, while it has indeed been a rough week for precious metals markets, comparing close of trading this Thursday with the close of trading exactly one week ago, gold prices are up by about $1, and this in spite of the fact that taper talk dominated news headlines this week.
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