Current pre-election lull could end abruptly in November as fiscal cliff careens closer, says Sumit Roy
Whether
gold declines further from here or rebounds is dependent on the fate of the broader financial markets. The correlation between the yellow metal and stocks is growing stronger. Some of this has to do with the fact that as stocks decline, the U.S. dollar tends to rise, which is a bearish factor for
gold.
Additionally, investors become more wary of deploying capital into risk assets in general --
gold included -- during broad market corrections. ...
The more immediate catalyst for markets may come two weeks from now, when U.S. voters head to the polls to cast their ballots in the presidential election on Nov. 6. Regardless of who the victor is, the result will remove some uncertainty from the outlook, and is thus a positive.
Attention will then quickly turn to the U.S. fiscal cliff at the end of the year -- when automatic tax hikes and spending cuts will go into effect, barring intervention by Congress and the president.
The bullish outcome would be a resolution of the fiscal cliff without any tax increases or immediate budget cuts. Whether the lame-duck Congress can work with the new or incumbent president to avoid the fiscal cliff remains to be seen. After last year's debt ceiling debacle, investors are well aware that political brinksmanship can have potentially devastating economic and financial markets consequences.
Bottom Line: We recommend cautiously initiating new positions in
gold and
silver on this pullback, but traders should brace themselves for more volatility as U.S. politics becomes a significant market influence over the next few months.
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