The big event for all markets was the Fed’s announcement on Wednesday that there would be no taper. Before that gold and silver had continued their drift downwards making a mockery of chart support levels, with gold bottoming out at $1292 and silver at $21.22. The turnaround after the FOMC announcement was worth over 5% on the gold price and 9% on silver in just a few hours. And the fact that these new higher levels broadly held after the initial spike is encouraging.
Tapering
is now expected to be postponed, and the December FOMC meeting has been
mentioned as the likely timing. However, there is never a good time to
tighten on money supply unless the economy is over-heating, and
September was probably the last reasonable opportunity. Why? Assume the
economy recovers a bit more and is on a sounder footing in three months’
time. Is that going to be the time for the Fed to jeopardise the
recovery by tightening?
Instead it increasingly looks like QE to infinity. While other
commodity markets and equities also moved up strongly, this move is
important for precious metals because of the inflationary implications.
Technically, they appear to have formed a second bottom, higher than the
first in late-June at $1180. So by definition, it looks like a new bull
phase is established, though for comfort chartists would like
confirmation with gold challenging $1440 and silver $25.
There are a number of strong factors in both metals’ favour. First,
there is scarcity of physical metal, which shows no signs of
alleviating. Second, the open interest on Comex is at rock-bottom,
particularly in silver (see charts), which tells us the habitual longs
are under-invested. And third, there will be the dawning realisation
that quantitative easing cannot be wound down without unpalatable
financial and economic consequences, which is the logical conclusion to
be drawn from the Fed’s decision not to taper.
In the coming days there is bound to be an element of confusion in
capital markets, as strategists economists and traders rationalise the
tapering surprise. It is therefore possible that the initial shock will
temporarily wear off and gold might drift lower and test support at the
$1340 level. If so, this could be seen as a golden opportunity by those
worried about long-term inflation prospects, the eventual result of
infinite QE.
Next Week
A quiet week is in prospect with regard to announcements. It will be interesting to see if genuine buying develops in futures markets on further thoughts about the Fed’s QE dilemma.A busy week ahead, with interest rates taking centre stage on Wednesday.
Monday: UK: Nationwide House Prices. Eurozone: Flash PMI. US: Flash Manufacturing PMI.
Tuesday: UK: BBA Mortgage Approvals. US: S&P Case-Schiller Home Price Index, Consumer Confidence Index.
Wednesday: US: Durable Goods Orders; New Home Sales.
Thursday: Eurozone: M3 Money Supply. UK: Current account. US: Core PCE Price Index; Initial Claims; Pending Home Sales. Japan: Core CPI.
Friday: Eurozone: Business Climate Index; Consumer Sentiment; Economic Sentiment. US: Core PCE Price Index; Personal Income; Personal Spending.
