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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.
Jeffrey Nichols
NicholsonGold.com
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