Long constrained between $1,180 and $1,300 an ounce, gold has finally broken out on the upside, only to find itself trading within a new, albeit higher, range. Gold now enjoys a “floor” of solid support at $1,300 with initial support kicking in around $1,340. On the upside, initial resistance kicks in around $1,385 and continues up to the psychologically important $1,400 level - but, as outlined below, this “ceiling” could prove vulnerable in the weeks ahead.
Positive Momentum
Gold’s technical picture has improved quite significantly in the past week as prices rose through several layers of overhead resistance to trade at one point as high as $1,385 an ounce. Importantly, momentum has shifted from negative to mildly positive - and further price advances now have the potential to trigger a buying spree among some of the very same institutional traders and hedge-fund investors who not long ago were aggressive sellers of physical gold and paper proxies.
Recent news that some hedge-fund managers, including the likes of John Paulson and George Soros, were big sellers in this year’s first half helps explain gold’s disappointing performance earlier this year. ?It is likely that this recent wave of institutional sales has run its course as most, if not all, of those that wished to sell have already done so and, for some, the cupboard is now bare.
Favorable Factors
Looking ahead, seasonal factors, especially the approaching festival season and associated rise in gold demand in India, the restocking by jewelry manufacturers after the summer holidays, continuing strong demand from China, and a pick-up in central-bank acquisitions, should also contribute to gold’s recovery.
Taken together, these bullish gold-price trends and developments should be enough - irrespective of prospective Federal Reserve monetary policies - to assure gold prices continue moving higher in the months ahead.
There may be other positive wildcards for gold over the horizon:
For one thing, unrest and uncertainty in the Middle East could easily metastasize - prompting a rise in safe-haven demand and possibly affecting world oil prices and supplies to gold’s advantage.
For another, fiscal gridlock and the approaching Federal debt ceiling could raise financial-market anxieties, weaken the greenback, and worse, trigger a downgrading of U.S. Treasury debt by the credit-rating agencies.
And, not much discussed, the long-term decline in world gold-mine output already underway is likely to further encourage some of the gold bulls, even if it has little significant affect on the metal’s overall supply/demand situation.
Watching the Fed
Minutes of the Federal Reserve’s July policy-setting meeting provide no clear indication when the central bank will start shaving back its $85 billion monthly bond-buying program.
Many Fed watchers, financial-market traders, and investors expect the Fed will begin scaling back its monetary stimulus in the next month or, at least, announce a start date following its mid-September FOMC policy-setting meeting.
In April, when Chairman Bernanke hinted that a reduction in monetary stimulus could begin later this year, surprised gold-traders panicked and the metal’s price fell precipitously. Now, however, the imminent onset of tapering is, for the most part, already reflected in the current price of gold and the prices of other financial assets.
If, indeed, the Fed initiates or simply announces a start-up date for the implementation of a decreasingly stimulative monetary policy, the yellow metal would most likely suffer a short-lived price setback.
On the other hand, if the upcoming economic indicators point to a weaker-than-hoped-for economy and disappointing job growth - so much so that the Fed is unlikely to begin tapering anytime soon - gold could rally smartly, unequivocally reestablishing the long-term uptrend in the metal’s price.
But tapering is not tightening - and monetary policy will, in any case, remain in a stimulative pro-gold mode for months, if not years, as the economy continues to struggle to regain its footings.
Regardless of prospective Fed policy and the near-term direction of the U.S. economy, we continue to believe the risks of a significant and lasting downward gold-price correction are significantly less than the possibility of a quick bolt and durable bolt into higher territory.
