On this week’s news roster we had a hurricane
and the Republican National Convention (which scared some Democrats more than
the hurricane), but all eyes are on a small town in the state of Wyoming,
Jackson Hole, whose claim to fame is majestic Rocky Mountain scenery and the
annual meeting of the Kansas City Federal Reserve. At the end of every
August, central bankers and economists converge here to take in the views and
discuss the latest economic issues. But mostly, along with everyone else on
the planet, they wait to see what the Fed Chairman Ben Bernanke will say at
10 a.m. Eastern this morning.
It seems like there are too many people expecting
too much from this speech. Gold investors are hoping that he will at least
hint today that the Fed is ready to launch another round of bond purchases in
order to lower long-term U.S. interest rates and stimulate more borrowing and
spending. The Fed signaled last week it’s ready to take further steps
to spur the economic recovery, according to minutes released Aug. 22 of the
central bank’s most recent meeting, on July 31-Aug 1. There are still
sweet memories of gold’s price action when two years ago
Bernanke’s remarks at Jackson Hole triggered a stock-market rally and
an upsurge in the price of gold. Bernanke hinted then that the Fed might
begin a second round of quantitative easing and the Fed did indeed start
buying bonds three months later. The central bank bought $2.3 trillion of
debt from 2008 to 2011 in two rounds of what’s become known as
quantitative easing. And QE3 isn’t the Fed’s only option. It
already plans to keep short-term interest rates near zero through late 2014
unless the economy improves. Also, the so-called "Operation Twist"
is still in process. This is where the Fed sells short-term Treasuries and
buys longer-term Treasuries. The program has been extended through the end of
Meanwhile to get a better idea of what is currently
going on in the gold market, we now turn to the technical portion of
today’s essay that is dedicated entirely to the yellow metal (charts
courtesy by http://stockcharts.com.).
In gold’s short-term chart we see two major
support-resistance levels are in play and gold has attempted to break above
these levels both last week and this week.
The breakout above the major declining, medium-term
resistance line has never been confirmed. Only one close was seen slightly
above it (on Friday) and this immediately followed by a decline (on Monday).
The price of gold is now visibly below this line and, for two days, gold has
closed below the 300-day moving average as well. It seems likely that the
breakout above the 300-day moving average is being invalidated as well.
The implications are quite bearish unless a strong
move higher is seen to invalidate this view. This is not expected, however,
based on the strength of the resistance lines and the bullish situation in
the USD Index. In addition, RSI levels appear to confirm that a local top has
emerged as well, similarly to what was seen in February.
Let’s move on to the next chart that will
allow us to have a look at gold from a non-USD perspective.
In the chart of gold from the Japanese yen
perspective, the outlook is quite similar to what we saw from the USD
perspective and the implications are bearish here as well. The RSI level
moved to 70 and then declined which in the past has coincided with local
tops, most recently in late February and also in August a year ago.
Summing up, the situation in gold has deteriorated this week as
it has declined to two important resistance levels: the declining resistance
line based on recent local tops and the 300-day moving average which has
bearish implications. The long-term trend in gold is up, but the medium-term
trend is down and declines are to be expected.
Thank you for reading. Have a great and profitable week!