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Gold ETFs Rise on Safe Haven Demand Despite Stronger Dollar


Fears over the US fiscal cliff and Greek debt have driven gold ETFs to three-week highs. The re-election of President Obama removed investor doubts about the continuation of aggressive quantitative easing by the Federal Reserve — Mitt Romney had vowed to replace the current Fed Chairman at the end of his term.

Investor focus quickly turned to the looming ‘fiscal cliff’ issue. Investors fear a drawn-out negotiation process on taxes and are concerned about US leaders’ ability to find a compromise that will prevent disastrous automatic across-the-board expenditure cuts.

Anxiety over this issue and continued uncertainty about whether the Troika will agree to release Greece’s next loan tranche helped drive precious metal prices higher last week and has kept demand for gold ETFs strong. [Greece ETF Choppy on Bailout Uncertainty]

Gold is likely to be one of the better hedges against a worst case fiscal cliff/downgrade scenario. Last summer, during the Congress’s budget ceiling standoff and downgrade, the gold price rallied 30%. [Outlook for Gold ETFs]

Improving economic data indicating that the US recovery is gaining traction has caused the dollar to appreciate over the past month. Of particular note, the University of Michigan’s preliminary index of consumer sentiment for November increased to 84.9 from 82.6 the prior month.

Normally an appreciating dollar tends to push the gold price down. However, last week we saw dollar appreciation coupled with a rising gold price, highlighting investors are currently viewing gold as a safe haven as they await the outcome of fiscal negotiations.

‘Industrial’ precious metals benefit from China’s low-inflation economic recovery

Chinese industrial production rose 9.6% year on year in October, higher than consensus expectations of 9.4%. Retail sales also rose 14.5% year on year in October, up from 14.2% in September.

Inflation fell, with CPI of 1.7% in October, the lowest level in 33 months. [China ETF Trading Picks Up on Rally, Leadership Transition]

Signs the economy has bottomed out with few signs of inflation bode well for the more industry-intensive precious metals such as silver, platinum and palladium.

An additional longer-term positive is that at the 18th Chinese Party Congress, leaders pledged to double China’s per-capita income by 2020, indicating that pro-growth policies will continue to be pursued in an aggressive manner.

Key events to watch this week

Investors will be keeping an eye on signs of Troika’s views on Greece’s fiscal progress, progress of “fiscal cliff” negotiations, FOMC minutes and a BoE Inflation report.

The FOMC minutes will be closely viewed for the board’s interpretation of improving economic data and what milestones must be met before the Fed considers moderating it’s quantitative easing.

The BoE, which halted further purchases of assets last week and has slowly become more introspective about its forecasts, will publish it thoughts on inflation (i.e. its medium term policy target) and economic growth.

ETFS Physical Swiss Gold Shares (SGOL)