Gold’s Outlook Rests on the Euro-zone and…the Swiss National Bank?

Fundamental Forecast for Gold: Neutral

• Crude Oil, Gold Outlook Continues to Hinge on EU Summit Outcome
• Gold Inching Towards November Low
• Gold Triangle Presents Breakout Opportunity

The spot price for Gold fell to a spot price of $1711.47/oz by the end of the week, trading mostly to the downside despite a brief rally back to risk-correlated assets on Friday. The decline over the course of the week was not helped by significant U.S. Dollar strength on Thursday, due to the widespread demand for safety following the European Central Bank’s rate decision. With Gold now holding a strong correlation to the EUR/USD and U.S. equity markets, bullion’s ensuing price action should mirror broad market sentiment.

The sideways rally to and risk this past week was triggered mainly by both optimism and pessimism that the Euro-zone summit would produce sufficient results. At minimum, market participants trading bullion were expecting the European Central Bank to announce some plan to help stem the assault on European debt markets. With little clarity provided at the conclusion of the Euro-zone summit, and with the ECB standing firm as an independent institution, Gold was dumped swiftly on Thursday, leading to the alternative currency’s single largest daily drop in over two weeks.

Looking ahead to the coming week, there are some events on the economic docket that could provide bullion will some renewed luster as market participants seek safer risk as the global economy continues to show signs of exhaustion. Still, our outlook remains muddled by the fact that a liquidity drain from the market would drag bullion lower. Early in the week, British inflation data is due, but is expected to show a slower pace of price pressures, following months of elevated price pressures. The same report is due on Thursday for the Euro-zone and Friday for the United States, and those too are expected to show signs of moderation. Considering that gold’s historical roll has been that as a hedge against inflation, easing pressures would likely sink the precious metal.

In perhaps what is the most interesting event on the calendar across the major currencies, the Swiss National Bank is holding its quarterly monetary policy meeting on Thursday. It is widely expected that the SNB will keep rates on hold, given the downside pressure to the Swiss economy and the floor in place on the EUR/CHF. Recent data out of the landlocked nation suggests that the economy is facing continued deflationary pressures as well as a slowing economy, due to the overall strength of the Franc over the past year. As such, we look to whether or not the SNB will raise the floor on the EUR/CHF again, this time to 1.2500 or even 1.3000. The EUR/CHF should make an interesting play this week as such; if the floor is raised, gold is likely to catch a bid higher.

Beyond that, we turn to the EUR/USD and the U.S. equity markets for a signal as to where the precious metal is heading, given gold’s correlation to risk-correlated assets at present time. With liquidity conditions tightening across the board, any weakness gold exhibits will likely be extenuated, while upside remains limited as Euro-zone nations face the looming risk of several downgrades by the various rating agencies. –CV