US GOLD - Comex gold futures inch higher but still heading for large weekly loss

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Tom Jennemanntom.jennemann@fastmarkets.comSenior North American Correspondent973-204-3383

New York 21/12/2012 - Gold futures have outperformed stocks and most other commodities in the US on Friday morning, possibly on some safe-haven demand, bargain hunting and short covering.

But the market remains on edge while the US teeters over the fiscal cliff and after the significant losses it has incurred since the end of last week.

Gold for February delivery on the Comex division of the New York Mercantile Exchange was last up $7.80 at $1,653.70 per ounce but the yellow metal is still down about $50 or three percent for the week.

“Gold might be doing a bit better than stocks, which are in freefall, but we shouldn't forget that very real damage has been inflicted during the last couple of sessions,” a US-based gold trader said.

“We might be seeing some short covering and consolidation now but this market is in the midst of a pullback that will take time to recover from,” the trader said.

Last night, Republican House Speaker John Boehner suffered a stunning and embarrassing defeat - his effort to pass his so-called Plan B to avert a fiscal crisis collapsed after conservative Republicans refused to support the legislation, which would raise taxes on those who earn more than $1 million per year.

Lawmakers have until the end of the year to reach a compromise on budgetary issues - inaction would trigger huge spending cuts and new taxes that could slow growth and tip the US economy back into recession.

“Boehner's problem was with his own party and was with the Tea Party Republicans who refused to go along with Plan B, preferring a much more severe, much more austere, and a much more doctrinaire legislation. As the phrase goes, 'The Good has been sacrificed to the Perfect',” Dennis Gartman, editor of the Gartman Letter, said in an impassioned report.

“Many of the Tea Party Republicans won election handily and had no fear of losing their seats in the next two years except perhaps to potential candidates further from the Right; hence they were quite prepared to vote against Plan B,” he added.

Immediately following Boehner's decision to withdraw the bill, global equity and commodity prices fell dramatically.

“At this point, with stock prices plunging on the open of trade, the last day before the Christmas holiday, the Republicans are going to get the blame for sending the US to the holiday with these massive losses,” Gartman said.

“The President has played a far better game of politics; the far right wing 'Tea Party-ites' have played a game of lunacy, and although we do tend to have right-of-centre, Tea Party philosophies here at The Gartman Letter, we know that what has transpired over-night is lunacy on the part of these legislators,” he said. “They may be appeasing their constituencies back home, but they have put the country in jeopardy in the process.”

Gold's behaviour in the immediate aftermath of last night's US political fireworks has proved interesting. The metal immediately sank in electronic trade, falling to a four-month low of $1,636, but has since clawed back those losses to trade near $1,650.

“The gold bulls have to be pleasantly surprised this morning to see gold prices diverge with noted weakness in US equities. In other words, gold is showing some flight to quality or safe-haven action and that could be the result of an increase in fears that the US will at least temporarily fall over the fiscal cliff,” the CME Group said in a market commentary.

In wider markets, the euro was about a third of a cent weaker at 1.3209 against the dollar, while Germany's DAX and France's CAC-40 were down 0.74 percent and 0.54 percent respectively. The Dow Jones and S&P 500 opened 1.07 percent and 1.17 percent lower.

As for the more industrial commodities, light sweet crude (WTI) oil futures for February delivery on Nymex were down 97 cents at $89.16 per barrel and the most actively traded Comex copper contract was at $3.5460 per pound, up 0.95 cents.

Meanwhile, gold could have further to fall after recently dropping below its 200-day moving average, which was about $1,669, Sharps Pixley noted.

“According to some analysts, the price may further drop to $1,535. Jim Rogers, the commodities guru, is not surprised about the gold price correction, which has continued for about 15 to 16 months,” it said. “He expects more corrections to come.”

“In the short run, corrections are likely related to year-end tax-related selling, fund liquidations, a short-term rebound in European confidence, and the impasse in the US fiscal cliff negotiations. A low inflation and a weak growth scenario will not be favourable to gold,” it added.

In the other precious metals, Comex silver for March delivery was up 20.7 cents at $29.885 per ounce. Trade has ranged from $29.670 to $30.095.

“While silver has also shown some initial gains, the gains don't appear to be overly impressive, especially when one considers the magnitude of the slide in silver prices on Thursday,” CME said.

“Some players might suggest that gold and silver are garnering some flight to safety buying, but others could effectively suggest that the gains this morning are nothing more than a technical balancing of a severe short term oversold condition,” it added.

Platinum futures for February delivery on Nymex were down $5.90 at $1,540.30 per ounce and the March palladium contract was at $676.00, down $4.25.

(Editing by Mark Shaw)
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