Although continued “uncertainty” and “caution” remain the gold market’s watchwords, particularly for short-term traders and speculators, the odds favor further gold-price recovery in the weeks ahead.
Indeed, next week could be surprisingly good for gold, with prices moving back toward the top of the recent $1,300 to $1,350 range . . . and possibly breaking out to still-higher territory.
For the moment, we believe gold prices are still in a “bottoming phase” and may have more work, technically speaking, around recent levels before breaking through overhead resistance and moving substantially higher.
Importantly, as we have pointed out repeatedly in recent commentaries, memos, and tweets (@NIcholsOnGold) the risks of a major lasting downward correction are significantly less than the possibility of a quick bolt into higher territory and the re-establishment of the long-term bullish trend. To my mind, the question is not “if” but “when”.
Talk of “tapering” should recede for a few weeks now that the late-July FOMC meeting is behind us — with the Fed’s post-meeting statement remaining essentially unchanged with regard to when the central bank will begin lessening the magnitude of its monthly asset purchases. With the Fed’s next policy setting meeting not until late September, the market will look elsewhere for clues to prospective gold-price moves.
As today’s employment data point out, despite the decline in the headline unemployment rate, the overall labor market remains bleak, to say the least. This, along with other recent indicators — including recently reported inflation data well below Fed targets — suggest that financial markets (including the gold market) will experience a shift in expectations, with a growing number of participants anticipating a later start-date for the Fed to begin cutting back its program of quantitative easing.
On the bullish side, growing market chatter about Federal Reserve Board succession — and what Chairman’s Bernanke’s successor at the Fed’s helm may mean for prospective monetary policy — will move to center stage. Uncertainty about prospective monetary policy under a new Chairperson will be increasingly supportive of gold as Bernanke’s term draws to an end and a new Chair shows his or her mettle. So too will talk about prospective fiscal policy (or lack thereof) as the federal debt limit approaches this autumn.
Following on the heals of today’s less-than-consensus expectations for U.S. factory orders and recent consumer sentiment data, we expect the economic indicators to be more supportive of gold in the weeks ahead — and disappointing stats will not be confined to the United States, but importantly China and other emerging economy nations, as well as the European Union. All of this points to more — not less — monetary stimulus from the world’s major central banks.
From a technical point of view, today’s steep sell-off in Asian and European markets (prompted by early bets that the U.S. employment data would be bearish for gold) triggered a reflexive rush to cover long speculative positions as soon as gold fell beneath the $1,300 support level.
But the quick bounce back, reinforced by a clear reading of the newly released labor-market data, reinforces and strengthens support under the market, and will push some technical traders to test overhead resistance in the $1,335 to $1,350 range. Indeed, gold trading could be quite interesting in the days and weeks ahead.
