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Gold Is Seen Outperforming as Fiscal Cliff to Hurt Metals

Gold prices are poised to gain while base metals may decline in the short-term because of concerns about the so-called fiscal cliff in the U.S.

U.S. stocks saw the biggest weekly decline since June last week amid investor concern that the U.S. economy may slow if President Barack Obama and Congress fail to avert $607 billion in tax increases and spending cuts next year. Gold futures on Comex had their best week since January, gaining 3.3 percent, as the London Metal Exchange Index of six main industrial metals declined to the lowest since August.

“The U.S. fiscal cliff has short-term implications for commodities,” David Hemming, a portfolio manager at Hermes Investment Management Ltd., which oversees $2.2 billion in commodities, said in a phone interview in London Nov. 9. “Considering the concern is with the U.S. and it would be bearish for the dollar, gold should outperform as both a currency and a safe haven. The industrial metals have potential for further downside, but other than copper they are trading into their cost curves.”

The Standard & Poor’s 500 Index fell 2.4 percent last week, the biggest drop since June 1, while the S&P GSCI Index of 24 raw materials advanced 1.7 percent, the most since Sept. 14.

Hedge funds and other large speculators lowered combined net-long positions across 18 U.S. futures and options by 11 percent to 931,048 contracts in the week ended Nov. 6, the biggest cut since June 5, data from Commodity Futures Trading Commission showed Nov. 9. Gold wagers declined to the lowest since August, according to CFTC.

Negative Impact

“Any combination of cutting government deficit and raising taxes is probably going to have a net negative impact on global growth and U.S. growth, which would then lead to the softness in commodity prices, especially those in the energy and the industrial metal sectors,” said Mark Rzepczynski, head of the funds group at FourWinds Capital Management, which oversees $1 billion in natural-resource assets. “The U.S. still plays an important role in the global growth cycle.”

The U.S. risks entering a recession that will hurt economic growth worldwide unless the fiscal cliff issue is addressed, Fitch Ratings said Nov. 8. No solution from Congress may mean further easing and higher inflation, which will benefit gold, Rzepczynski said by phone from Boston on Nov. 9. Investors should be “more defensive” towards industrial commodities, he said.

While there may be some short-term volatility in the markets because of the fiscal cliff, U.S. politicians will eventually find a solution, Hermes’ Hemming said.

The leadership transition in China, the biggest consumer of everything from metals to soybeans, will be important for commodities, especially if new stimulus measures are announced, Hemming said. The ruling Communist Party is holding a congress in Beijing to appoint new leaders.

“In terms of the industrial metals, Chinese stimulus could offset the U.S. fiscal cliff fears,” Hemming said. “It depends on how concerned the Chinese authorities become by the U.S.”

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