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Gold ETFs Hold $1,700 as Fiscal Cliff Talks Drag on


Precious metal ETFs are seeing a wide performance divergence as investors remain conflicted between fiscal cliff risks and signs the US and China are recovering.

In the early part of last week the gold price slid from $1753/oz to $1719/oz on hopes that headway on fiscal cliff discussions was being made. By the end of the week, however, the gold price had risen to $1726/oz as the House speaker lamented “no substantive progress” had been made.

The uncertainty over the fiscal cliff stands in contrast to growing signs of a recovering economy. US Q3 GDP data was revised upwards to 2.7% annualized growth from an earlier 2.0% estimate. The housing market, which has for years been a drag on the US economy, is now rebounding. House prices increased for the sixth consecutive month (by 3.0% month on month in September).

Should US politicians come to an amicable solution on the fiscal cliff, cyclical commodities, including the white “industrial” precious metals such as silver, platinum and palladium will likely benefit (as we saw last week). For now, gold continues to be investors’ favorite safe haven asset, with gold ETP holdings extending their record highs.

Greece inches closer to receiving its much-needed tranche of aid

As the uncertainty around Greece’s near-term solvency starts to lift, the euro rose against the US dollar, helping to boost precious metals prices. After a third attempt, the Troika finally came to an agreement on Greece’s bailout terms. The new compromise involves a commitment to cut Greece’s debt to 124% of GDP by 2012 (rather than 120%) and to 110% of GDP only two years later.

Greece’s borrowing rate was cut by 1%, maturities doubled to 30 years and interest payments were deferred by ten years. Under the terms laid out by the IMF, Greece must buy back some of its debt at distressed prices to reduce its overall debt burden. The deal was approved by German Bundestag on Friday, but it still needs the approval of other Euro-nation parliaments.

While the agreement falls short of the debt write-offs (or “hair-cuts”) the IMF favored, the fact that some countries are lending to Greece more cheaply than they can borrow, has imposed losses on Greece’s creditors.

Platinum supported by a US shift into clean diesel cars

Sales of clean diesel vehicles in the US have increased by 25.6% this year. Clean diesel cars only account for 3% of US sales (compared to over 50% in Europe).

A shift toward clean diesel cars in the US will likely boost the demand for platinum that is used in diesel auto-catalysts.

Palladium prices are also benefiting from the belief that US and China recovery will boost palladium sales destined for the gasoline auto-catalysts that dominate the Chinese and US auto markets.

Key events to watch this week: US fiscal cliff negotiations

US politicians continue to bicker, with Republican House leader Boehner dismissing a Democrat proposal outright, saying “the White House has to get serious.”

Time is running out and markets are becoming increasingly anxious. US jobs numbers late this week will also be watched carefully, though Hurricane Sandy is expected to disrupt the relevance of the month’s numbers.

ETFS Physical Swiss Gold Shares (SGOL)