Gold set for best week in 2 months on Fed stimulus outlook

Gold remained firm above the $1 300 mark on Friday and is on track to post its best weekly performance since August as the U.S. dollar hovered over an 8-1/2 month low on speculations that the Federal Reserve will refrain from scaling back its Quantitative Easing program until 2014. Silver was little changed, while platinum and palladium marked moderate gains.

On the Comex division of the New York Mercantile Exchange, gold futures for December settlement fell by 0.24% to $1 319.80 per troy ounce at 7:59 GMT. Prices shifted between days high of $1 325.90, the strongest level since October 8, and low of $1 314.70 per ounce. The precious metal surged 2.7% on Thursday, a fourth straight daily gain, and extended its weekly advance to 3.8%, set for the best week since the five days to August 16.

Gold continued to advance on Friday as the U.S. dollar was pressured down by speculations that the debt impasse and the 16-day federal government shutdown have caused extensive damage to the U.S. economys growth and confidence in the fourth quarter which would leave the Federal Reserve unwilling to taper its monetary stimulus this year. The precious metals movements largely tracked shifting expectations for tapering this year and has lost 21% so far on projections that the Fed will commence scaling back the stimulus this year and bring it to an end by mid-2014. Laurence D. Fink, BlackRock Inc. Chief Executive Officer, said yesterday for CNBC that the Federal Reserve may not scale back its quantitative easing program before June next year.

The U.S. dollar index, which measures the greenback’s performance against six major counterparts, traded at 79.69 at 7:59 GMT, down 0.06% on the day. The December contract fell to a 8-1/2 month low of 79.66 and extended its weekly decline to 1%. The greenback tends to trade inversely to dollar-denominated raw materials as weakening of the dollar makes them cheaper for foreign currency holders and boosts their appeal as an alternative investment.

U.S. lawmakers managed to reach an accord to raise the nation’s debt ceiling and end the 16-day government shutdown but the agreement was only a temporary measure and was seen as kicking the can down the road. The bill provided government funding until January 15 and extended the nation’s borrowing authority through February 7. There was however no resolution to lawmakers’ long-term divides on fiscal policy and no major policy changes sought earlier by Republicans were achieved.

After the initial positive sentiment from the deal, gold was shot up above the $1 300 mark on Thursday after the dollar slumped as Dagong Global Credit Rating Co., a Chinese rating agency, downgraded its U.S. credit rating to A- from A and maintained its negative outlook. Despite the agency hardly being followed outside of China, the downgrade triggered an instant fall in the U.S. dollar as other credit agencies also pointed out recently that the U.S. creditworthiness is not as good as it once was. Fitch Ratings warned earlier in the week that the U.S. AAA sovereign rating could be lowered and put it on negative watch. In August 2011, Standard & Poor’s lowered its U.S. rating to AA+ after prolonged debt limit discussions, such as the recently ended, almost shut the government.

Dominic Schnider, head of commodities research at UBS AG’s wealth-management unit, said on Bloomberg: “What’s happening with the debt deal is postponing all the pain that we’re going to see down the road, and it might hamper the growth momentum. With the prolonging of the problems in the U.S., tapering’s going to be postponed. Gold is supported but let’s be cautious about calling for a much higher price.”

Assets in the SPDR Gold Trust, the biggest bullion-backed ETP, fell to 882.23 tons yesterday from 885.53 tons, data on the website showed. This was the lowest since February 2009.

Elsewhere on the precious metals market, silver futures for settlement in December fell by 0.07% to $21.932 per troy ounce at 7:55 GMT. The metal rose to a one-week high on Thursday and is up 2.8% on the week so far, heading for its first weekly advance in three. Platinum for delivery in January rose for a fifth day and traded at $1 441.10 per ounce at 7:54 GMT, up 0.43% on the day. The contract rose to a session high of $1 444.90, the highest since September 20, and extended its weekly advance to nearly 5% after falling for seven straight weeks. Palladium futures for December settlement rose by 0.20% to $739.30 an ounce. The metal surged to session high of $742.50, the strongest level since August 29, and is headed for a second weekly advance in a row.