GOLD OK, so it was the rally that wasn't. After a decent-ish third quarter, gold headed back down. The short sellers got it right. There is, of course, a one-word reason fortheslideingold-'tapering'.Actioninthe market is dominated by 'when' now rather than 'if ' the Fed will move to take its foot off the quantitative easing throttle. Much second-guessing abounds with the coming month's economic data in focus. Recent good employment numbers has underlined the potential for tapering to begin as early as the next Federal Open Market Committee (the Fed's policymaking body) meeting on 17-18 December if November's employment numbers continue the trend. Meantime outflows from Exchange Traded Funds have continued. Gerhard Schubert of Emirates NBD Private Banking commented, "...we have witnessed a withdrawal of 26 per cent since the beginning of April 2013 (2487 to 1842 tonnes). This equals roughly one-to-one the price loss of 25 per cent in the same period. One of the main questions for 2014 remains how much more of outflows from gold into other asset classes, mainly into US and Japanese equities, will occur and when do we reach the so-called 'hardcore' investment." Any prospect of a rise in inflation in the world's major economies seems unlikely in the medium term and that leaves gold facing the prospect of competing with dividend-paying equity markets. However, when the next set-to over Government spending happens in Washington early next year there may be a spike upwards. OIL As we discussed briefly last time, dialogue appears to be opening up between the US and Iran . Last month the US and five other nations, collectively the P5+1 group, agreed to put on hold efforts to cut Iran's crude sales even further. It is an interim agreement only and it holds Iranian exports at around 1m barrels per day (bpd), which is roughly this year's average, still well under the 2.5m bpd in early 2012. It's a move forward albeit one that could still be reversed and it has acted as a cap to the oil price. That being said, we are now moving into the period of peak demand with the Northern hemisphere winter approaching. Oil traders are now keeping a weather eye on US inventories, which touched their lowest in November since the US Government began tracking stocks in 1982, according to reports from Reuters. Add supply disruptions to Libyan exports with tribal and militia activity reducing shipments to a fraction of capacity and there is reason enough to hold prices firm if not push them higher. Looking further ahead into 2014, increasing shale oil production in the US will be a major determinant in the oil price with global oil supply now expected to run ahead of consumption even as the global economic recovery continues. So the price is likely to soften. Giyas Gokkent, Chief Economist at the National Bank of Abu Dhabi believes crude oil will average $105 per barrel in 2013, $101 per barrel in 2014 and $100 per barrel out to 2018. CURRENCIES INDIAN RUPEE (INR) At its 29 October monetary policy meeting, the Reserve Bank of India (RBI) raised the repurchase rate by 25 basis points to 7.75 per cent. It was not unexpected and follows a similar increase at the previous meeting. The RBI also continued to ease back on the emergency measures put in place in July that had been implemented to prop up the INR. FocusEconomics (www.focus-economics. com) reports that RBI Governor Raghuram Rajan issued an unscheduled press release on 13 November to clarify the Central Bank's position and strategy concerning recent developments in the value of the INR. Rajan claimed that recent volatility has no support from economic fundamentals and that the foreign exchange market had absorbed oil marketing companies' additional demand for dollars 'quite smoothly'. FocusEconomics forecast panellists expect the currency to be around INR 63.1/ $1 at the close of the fiscal year 2013/2014 and at INR 62.7/ $1 at the end of fiscal year 2014/2015. EURO (EUR) The Euro zone may have exited recession in the second quarter, after the longest contraction in continental Europe for more than 40 years, but that doesn't mean sweetness and light ahead. The European Commission itself has warned that European unemployment will remain near its record high for the next two years, sticking at around 12.2 per cent until 2015. The European Central Bank's decision to lower interest rates in November may have been influenced by lower-than- expected inflation numbers but HSBC believes the strength of the EUR itself may have been a factor. "In current conditions, it would be tempting to argue that the rise in the EUR is appropriate given the Euro zone economy has shown signs of revival. But the reality is that the pick-up in activity is modest. It is unlikely to be sufficiently potent to drag down lofty unemployment rates quickly, or deliver a robust cyclical improvement in fiscal balances. Nor is inflation an issue with CPI currently at a lowly 0.7 per cent YoY, in fact the threat of deflation is growing," said HSBC . STERLING (GBP) The UK economy is growing and the GBP traded up to a two-year high against the dollar at the end of November, at its highest level since early September 2011 . Data from the Bank of England showed the largest number of mortgage approvals in six years in October. Separately, Robert Gardner , Chief Economist at Nationwide, said, " UK house prices rose by 0.6 per cent in November, taking the annual rate of increase to 6.5 per cent - the strongest pace since July 2010 , though prices are still around six per cent below the all-time high recorded in late 2007." Against that background, the speculators are moving in on the GBP looking to see further gains. The Central Bank has reduced its stimulus to the housing market and that's being seen as a step towards overall policy tightening. That's also a bull point for the GBP but, on the other hand, using such 'unconventional' means suggests that UK interest rates are unlikely to move up any time soon yet. The new forward guidance policy should give early warning if that is likely to change but in the meantime the UK base rate could stay exactly where it is right now for all of 2014.
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