Gold prices climbed on Wednesday, tracking gains in the equity market as investors’ sentiment turned upbeat after the U.S. Congress managed to find a temporary solution as to fiscal crisis, preventing the economy from dreaded automatic spending cuts and tax hikes which would have plunged the U.S. economy back into recession.
Gold futures for February delivery gained $13 an ounce or 0.8 percent to settle at $1,688.80, having touched as high as $1,695.40 an ounce while spot gold also climbed 0.8 percent to close at $1,687.60 an ounce, easing from its two week high of $1,694.70 an ounce, hit earlier in the session.
A data provided by Reuters showed that trading volume was 30 percent below its 30-day-moving-average. However, options turnover in Market Vectors Gold Miners Fund (NYSE: GDX
), an exchange-traded fund (ETF) for gold producers, almost jumped two times its daily average since investors were buying options ahead of the sector's next move, said WhatsTrading.com options strategist Frederic Ruffy, according to Thomson Reuters.
In a note to investors, analysts at Brown Brothers Harriman, wrote, “There seems to be a collective sigh of relief as the full force of the U.S. fiscal cliff that could have dragged the world’s largest economy into a recession has been averted.”
However, the rally in the bullion market wasn’t as strong as equity and commodity markets since there are many headwinds that can restrict gold’s gains in 2013.
While the lawmakers reached an agreement which would allow raising taxes on America’s wealthiest individuals and families, quite a few other issues such as long-term spending cuts ($109 billion spending cuts on military and domestic programs haven delayed by two months) and decision on debt ceiling limit are still unresolved and investors can expect heated round of negotiations among congressional leaders.
“However, the results do not seem particularly satisfactory as the debt ceiling and spending cut decisions have been postponed for several weeks,” added analysts at Brown Brothers Harriman.
Besides economic stagnation in the euro zone and India’s federal bank’s directive on Wednesday, asking banks to raise restrictions on value and volume of gold in order to curb yellow metal’ imports as country grapples with widening current account deficit will keep prices in check.
Frank McGhee, head precious metals trader at Integrated Brokerage Services, said, “I think the reaction is way overdone, and I wouldn't be surprised to see a fairly substantial sell-off that could erase a lot - if not all - of these gains.”
Even though gold is traditionally considered as a safe-haven asset, lately, it has rather behaved as a riskier asset, tracking equities and oil and other commodity markets. This was the reason why gold had a disappointing 2012—depite of extremely accommodating monetary policy from the Federal Reserve and global central banks.
In 2012, although, the metal ended up nearly 7 percent, it also witnessed the worst fourth-quarter performance since 2008. The metal slumped 5.4 percent in fourth quarter as both safe-haven bets and inflation-hedge bets dried up in the backdrop of macroeconomic uncertainty.
On Wednesday slightly expensive dollar also put cap on gains. The ICE Dollar Index, a measure on U.S. unit’s performance against a basket of six major traded currencies, edged up to 79.923, having traded lower in earlier sessions. A weaker dollar, in general, boosts the demand for dollar-dominated commodities in international markets as those traders dealing in other currencies find it cheaper to buy.
In some other precious metal markets, silver futures for March delivery climbed 78 cents an ounce or 2.6 percent to close at $31.01. In platinum group metals, platinum for April delivery gained 1.7 percent to end the day at $1,568.00 an ounce while palladium for March delivery edged up 0.7 percent to settle at $707.95 an ounce.