Gold Prices vs. Debt Ceiling Debate

Gold

Downside risks abound gold prices as sentiment is less supportive on the debt ceiling debate . Gold prices tend to follow EUR/USD for guidance on forex strategies. Gold prices were not able to rally inspite of the tapering postponement and amid the plentiful catalysts that will supplement forex strategies. The prices of gold slipped lower than $1,300/oz since the US government shutdown.

Barclays economists on the other hand have the conviction that higher risk to the markets exist if the debt ceiling is not lifted by 17 October. The first interest payment is due on 31 October amounting to $6B. The next payment is due 15 November valued at $30B. Historically, the prices of gold reacted positively to the debt ceiling debate in 2011 increasing from $1,500/oz to slightly $1,800/oz. The rally occurred despite sovereign debt concerns like downgrade of Japan’s government rating by Moody’s and eurozone crisis.

Market Positioning

Forex strategies for gold market positioning were muted at the onset of 2013. The base case scenario for forex strategies is the debt ceiling that will be raised in time. This is because the uncertainty surrounding the sequestration and the lingering deadline for debt ceiling. Tumbling gold prices hovering to $1,700/oz falling further to $1,600/oz towards February. Speculative positioning scaled back by one third. Gold prices will resist yet another buying opportunity given the negative market sentiment, despite a catalyst lingers that could push gold prices higher.

Gold vs. Treasuries

On an intra-day basis, gold prices has been treading the US 10 yr treasuries. In 2011 however, gold prices rallied. The correlation of gold versus some external markets weakened substantially. On one hand, the three month correlation versus the US CPI was the strongest at the beginning of this year. But the correlation with the USD/EUR has strengthened and Barclays’ forex strategies for the USD is retained. The recent weakness of the USD is carried on over the remainder of the year but gold has sidelined yet another positive. Thus, risks to the upside look to be capped again for gold amid negative marketsentiment, particularly given the more hawkish-than-expected September Fed minutes.

Canada CPI

Meanwhile, Barclays economists noted Canada’s September CPI is the next key data release from Canada ahead of Bank of Canada rate decision on 23 October. The underlying trend in the Ivey PMI price index has stabilised. But this has yet to show a marked pick-up in prices. The market is looking for headline CPI of 0.1% M/M and core of 0.2%, up slightly from 0.0% and 0.2%, respectively, in August.

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