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ETF Securities: Gold Revisits $1,200 as Data Raises Tapering Risks


Market expectations rise on the FOMC signalling a reduction in bond buying this month.
Better-than-expected economic data from the US reignited fears of early tapering by the Fed, keeping commodity price gains in check, particularly precious metals. Despite the US government shutdown, US economic data has been consistently positive. Economic indicators continue to point to a pick-up in US economy, with the November manufacturing and jobs data both surprising on the upside. We expect the US Federal Reserve to begin to taper bond purchases in Q1 2014 as the employment picture continues to strengthen. Fed tapering is likely to provide support for the US dollar in the near-term-historically a headwind for gold price performance. The gold price has been under strong downward pressure in 2013, but last week the market appeared to draw aline in the sand at the US$1,200/oz. level.

There now appears to be an almost unanimous consensus belief that US economic growth, interest rates and the dollar will rise next year. This scenario is also now reflected in gold futures and ETF positioning. If there is any disappointment in US growth numbers or reduced confidence stemming from the brewing government budget fight, the tail risk event in 2014 could be a surprise counter- consensus rally of the gold price.

Gold futures move into backwardation.
Backwardation (when further out futures trade at lower prices) in gold futures is quite rare and prior to 2013, September 11, 2001 was the last incidence of backwardation in gold futures. In 2013 backwardation can be indicative of excess demand and last occurred when the market staged a modest recovery in July and August.

Although fundamental conditions have recently turned more bearish, gold may be forming a double bottom at US$1,200/oz. as the bifurcated market situation continues to pit physical buyers against more tactical product and futures sellers.

Palladium continues to buck the bearish trend.

Their association with gold and silver has been part of the reason platinum and palladium have suffered in 2013 despite their strong price fundamentals. Palladium remained the stalwart last week, gaining 2.3%. Year- to-date, palladium is up 5.3% -one of the best performing commodities in 2013.

Strong November US auto sales were likely a source of strength for palladium last week and part of the reason for the continued upward trend in the palladium-gold ratio. The price of palladium vs. gold reached the highest level since the peak in February of 2011 Palladium closed at a high of US$851/oz. in 2011 and we expect the price to return to the 2011 high in 2014 and likely extend beyond.