Gold whipsawed by gyrating sentiment about possible US debt deal. The US fiscal and debt impasse continues to whipsaw markets, with gold falling below US$1,300oz last week on indications a short-term debt ceiling increase might find bipartisan agreement. However, with the estimated 17 October debt ceiling breach looming and no further progress over the weekend, markets are back in risk-off mode, with gold pushing higher again.
Political misjudgement and resulting default (or even near default) would not just severely damage the US economy and the longer term faith in the US government’s commitment to repaying its debt, but would also have large negative reverberations across global financial markets and economies. Most investors appear to be betting that the consequences are so huge that even US politicians will eventually act rationally and find agreement.
The risk, however, is that irreparable damage has already been done to investors’ long- term faith in the US’s commitment to honouring its debt obligations, further accelerating investors search for alternatives to the US dollar as a reserve asset. With Europe still facing serious structural issues and China not yet ready to step up to the plate, in our view, gold’s role as an alternative hard currency and reserve diversifier with continue to grow.
Palladium benefits from 20% rise in China vehicle sales to 8 month high. The other, more industrially sensitive precious metals fared better than gold last week, led by an 0.8% gain in palladium. Better than expected vehicle sales in China helped to boost the palladium price, with palladium a key component of the autocatalysts used in China’s gasoline powered vehicle engines.
China vehicle sales surged 20% to an eight month high in September according to the China Association of Automobile Manufacturers .
The strong auto sales figures complements other data such as credit growth and industrial surveys that indicate China’s economy is continuing to grow at a healthy pace. While China’s September export numbers were below expectations, the weakness has been attributed to an artificially high base of comparison due to export over-invoicing last year and to fewer working days this year because of the timing of mid-Autumn festival. China’s Premier highlighted last week that China’s economic growth in the first nine month of the year was above 7.5%.
The continued strength of China’s economy should be positive for both palladium and platinum prices, with palladium benefiting from strong auto sales and platinum from robust China jewellery sales. Since 2009 China’s platinum jewellery consumption has been bigger than all platinum consumed by Europe’s auto industry.
Key events to watch this week. The main focus of markets this week will continue to be on progress on US debt/fiscal negotiations. Chinese GDP and industrial production will also be watched closely. Platinum and palladium are likely to benefit from any better-than-expected data. Eurozone industrial production and car registrations will also be released with implication for
platinum in particular. If agreement on a debt ceiling is not found quickly, gold is likely to see increasing hedging demand.