SEQUESTER BEGINS MARCH 1, COULD WORK AGAINST ECONOMY

Gold and Silver prices gave up some early gains this morning, as investors seem to have a better opinion of the global economy. However, there is much discussion around the beginning of the automatic spending cuts that would come with the sequester in the U.S. “There is no real negotiation between Democrats and Republicans on a compromise and the beginning of the sequester on March 1, therefore seems to be inevitable,” strategists at R.J. O’Brien wrote. They continued, “Once the spending cuts hit, Republicans and Democrats will assess the extent of the stock market damage and any public outcry at defense industry layoffs, furloughs of government workers, and cuts in services for services such as meat inspections and flight controllers.” In the past, economic uncertainty has been a boon for the Gold price.

With the better opinion of the economy specifically in the U.S., the dollar is gaining on its rivals. Historically, a stronger dollar has meant a lower Gold price, and it’s clear that the dollar is working against the Gold price at the moment. Physical demand, of course, is the other side to the story, and Yuichi Ikemizu of Standard Bank said, “We have seen very good physical demand from Southeast Asia and China. Asians are buying, but it is offset by the selling from funds in the Western market.”

At 9 a.m. (EST), the APMEX Precious Metals spot prices were:

• Gold, $1,611.20, Up $0.80.
• Silver, $29.96, Up $0.06.

GOLD PRICES DROP TO SIX-MONTH LOW THIS WEEK

This week had the right combination of factors to bring the price of Gold to a six-month low. Asian markets, including China, Japan and Korea, were closed this week for the Lunar New Year. Standard Chartered analyst Dan Smith said, “Gold is going to be pretty range bound in the days ahead with Asia absent.” MKS’ head of trading, Afshin Nabavi, said of Gold, “The market is looking at anything for direction for the time being and players are awaiting the [Group of 20 meeting] at the end of the week as something that could provide it.” Sharps Pixley said in a note, “Given China is on holiday this week to celebrate the Lunar New Year, physical Gold demand on the Shanghai (Gold) Exchange is expected to slow down after a year-on-year jump of 10 percent in January and February.”

Another major factor is the upcoming meeting of the leaders of the world’s leading central banks. Gold and Silver prices are down slightly as investors remain noncommittal ahead of the much anticipated G20 meeting this week. “Although people are not expecting anything dramatic to be said at the G20 meeting, there is still some uncertainty, which may see short-term investors cover their short positions in coming sessions,” Societe Generale analyst Robin Bahr said.

Gold and Silver prices added to losses this morning as reports of the Group of 20 nations statement have leaked. According to a draft statement, the G20 will vow not to devalue currencies in a competitive manner (like the “currency wars” that have been buzzed about lately), and also to monitor “monetary-policy spillover.” Historically, devaluing currencies have been bullish for the Gold price. Bank of America-Merrill Lynch analyst Michael Widmer said, “People are certainly looking at the G20 meeting and the statement, as currency talks may become a strong focus for the Gold market going forward.” MKS Capital seems to have another explanation for the recent drop, “The market now seems to be getting used to the more positive frame of mind of a recovering U.S. economy, which entails lower probability of continued [quantitative easing] and in turn a lower Gold price,” the firm said in a note. One key factor in recent price movements is that the euro is weaker against the dollar, which has typically resulted in a falling Gold price.

OUTLOOK FOR PRECIOUS METALS POSITIVE

With the major drop in Precious Metal prices this week, many investors are wondering what the future holds. There are many reasons for a positive outlook for Silver including demand from investors, record demand for 2013 American Silver Eagles and industrial purposes such as medical, electronics, and alternative energy sources like solar panels. Analysts from HSBC have increased their Silver target for 2013 as well as 2014. “Greater industrial Silver consumption is one of the most compelling arguments in favor of higher prices,” they said.

Central banks have been buying Gold at a record pace and don’t show any signs of slowing up. The World Gold Council (WGC) said that world banks, led by Russia, Brazil and Iraq, purchased a record 534.6 metric tons of Gold last year, the most since 1964. This accounted for 12 percent of the overall demand for Gold as compared to a 10 percent share in 2011. Central banks have been net purchasers of Gold since the second quarter of 2009. The WGC went on to report that India was again the world’s largest consumer of Gold last year, taking in 864.2 metric tons, followed by China with 776.1 metric tons. The two countries combined generated 56 percent of global jewelry demand and 43 percent of overall Gold demand. Those numbers have made many investors take notice.