(Posted: August 22, 2012)
Gold rallied this past week, showing some of its old spunk, first breaking through overhead resistance around $1,625 an ounce . . . and then piercing through the $1,650 level on Wednesday’s news from the Fed that more monetary stimulus could be in the cards.
As in recent months, gold’s price action has very much reflected buying and selling by institutional traders and speculators, driven by high-frequency program trading that rely heavily on momentum indicators and technical signals, as well as expectations of prospective U.S. monetary policy, Eurozone sentiment, and the latest move in the euro/dollar exchange rate.
Meanwhile, gold’s own physical-market fundamentals - including physical investment demand for bullion coins, bars, and investment-grade jewelry - have had much less influence on the day-to-day ups and downs in the metal’s price.¬† If anything, softer private-sector physical demand from both India and China has been a mild negative . . . while an influx of central bank buying on price dips has been an important positive influence.
Though we favor gold’s long-term prospects, its short-term path is by no means assured.¬† From a technical perspective, there remains much upside resistance around a number of key chart points all the way up to $1,925 an ounce, the all time high reached last September.
Importantly, gold will remain sensitive to the flow of economic and financial market news on both sides of the Atlantic - news which could one day send gold higher . . . and the next day lower.
For now, the single-most important factor influencing both technical traders and gold fundamentalists are market expectations of prospective monetary easing by the Federal Reserve.
Wednesday’s release of the Federal Open Market Committee’s most recent policy-setting meeting confirmed rising expectations of further Fed accommodation - sending gold immediately higher.¬† The key wording:¬† “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,”
Should more favorable U.S. economic indicators show an economy continuing to move forward, the chances of imminent stimulative action by the Fed would be reduced - and this would be perceived as a negative for gold.
However, interpreting the incoming information is no simple matter.¬† Just look at the recent data:
The pick-up in July retail sales and the improvement in consumer sentiment, increased employment and the recent decline in weekly new jobless claims, and the increase in home prices are all signs that the economy may be recovering - and additional Fed monetary accommodation may not be necessary anytime soon.
But, meanwhile, the unemployment rate in July ticked up to 8.3 percent, existing home sales have slowed and manufacturing has continued to weaken - all signs of a stalling economy that might elicit swifter Fed stimulus.
Complicating the Fed’s calculations is the low rate of consumer price inflation, which is running well below the Fed’s target inflation rate, and is provoking fear that the economy may be slipping into a dreaded deflation, a situation the Fed might try to avoid by stepping more forcefully on the monetary accelerator.¬† At the same time, rising world oil prices and the drought-related increase in grain prices may have the Fed worried.
What about prospects for the Eurozone?¬† In recent days, financial markets seem more willing to believe that somehow Europe and its single currency will somehow survive, accepting at face value the European Central Bank’s recent pledge to “do whatever it takes to preserve the euro” . . . and this has pushed the euro to a six-week high against the U.S. dollar - and the weaker dollar has been a key factor supporting gold’s recent advance.
Though of little influence on the day-to-day variations in the metal’s price, significant physical demand by central banks in the aggregate - the official sector - has underpinned the market and has effectively put a rising floor under the price.¬† Central bank buying picks up when prices drop toward their recent lows.¬† Most recently, when prices dipped below $1,600, stepped up official sector demand limited the sell off - and changed the price momentum from negative to mildly positive.