POLITICAL issues look like dominating markets this week. This started on Sunday when President Obama’s healthcare reform was passed narrowly by the House of Representatives. In France, Nicolas Sarkozy has seen his party battered in regional elections and tomorrow we have the last budget before the UK election. Finally, there is the European summit, which takes place against mounting German hostility towards both Greece and the EU.
Despite political uncertainty, indices grind higher while volatility (as measured by the Vix) has hit multi-year lows. But volumes remain light as investors continue to question both the strength and foundations of recovery. Perhaps this is why gold attracts so much interest, and continues to build a steady following. Many see gold as the ultimate safe haven and store of value and the fact it doesn’t pay interest is of no concern to gold bulls. They are more worried about seeing a return of their capital rather than a return on their capital. Certainly, the bulls see it as the only serious protection against the continued money-printing antics of governments and central bankers.
One of the big supports for gold last year was the news that central banks became net buyers for the first time in over 20 years. When compared with the central bank holdings of developed countries, emerging market central banks are underweight gold as a percentage of their FX reserves. Many seem anxious to remedy this, with the Reserve Bank of India snapping up 200 metric tons of IMF sales.
But this week it could be the regulators who provide the excitement. On Thursday, the Commodity Futures Trading Commission (CFTC) meets to discuss position limits on Comex products, including oil, gold and silver. With many traders convinced that precious metals prices are being suppressed by just a couple of major banks exceeding their limits, a resolution here could trigger a sharp spike in volatility.
