Gold is Reacting to News About QE3

As Wednesday Fed decided to maintain the Quantitative Easing Program in place, we could see the American dollar dropping but indices as DAX, Standard & Poor’s 500, Nasdaq and Dow Jones Industrial Average reaching historical highs. This decision was felt and integrated in the price of gold. Since Ben Bernanke announced a possible change of the stimulus program, we saw the price of gold increasing at a steady pace.

Since the beginning of 2013, gold lost nearly 20% anticipating a reduction in the stimulus program but starting with June, when the possible tapper was announced, gold start climbing, like it encapsulate the uncertainty and lack of trust of the investors, and clearly indicating the continuity of the QE3. Also, Lawrence Summers’s withdrew as a candidate to head the Federal Reserve made the gold climbing as a proof that Janet Yellen has now more chances to assume Ben Bernanke’s responsabilities and to continue the unconventional monetary policy.

If Fed will cut the stimulus, gold is expected to get on an increasing trend, reaching $1400 per ounce while if the stimulus is maintained, gold will oscillate at lower values, most probably respecting the boundaries of a range. Even if by the end of the year the FOMC will meet again, there are poor chances to see the QE3 tapered. Most probably, the decision will be taken by the new chairman of Fed which will integrate the decision in a new strategy to run the American economy.

As St. Louis Fed’s Bullard delivered a speech later today, he expressed his view regarding the stimulus program which is effective and benefic for the economy. He doesn’t see any problem in having Yellen as head of Fed. Also, the fact that the QE3 wasn’t tapered at the last meeting isn’t a surprise for him who doesn’t expect this decision to be taken by the end of this year. Even if they would have decided to taper, $10 billion would have made a difference, in his opinion.

4 Facts You Should Know About Gold

1) The factor that influences the most the long-term performance of gold is no longer the U.S.’ sentiment and behavior. Currently, the emerging markets are strongly influencing the precious metal as they covers almost 70% of the annual demand, while U.S. accounts for almost 10%. Covering the period April-June 2013, the demand for gold increased with 54% in China and 51% in India.

2) Central Banks remain committed to buying gold. Even if the demand in the second quarter (71 tones) didn’t exceed previous performances, Central Banks were net purchasers of gold for the tenth consecutive quarter.

3) Gold remains an element which has the quality of balancing the investors’ portfolios. The U.S.’s interest rate policy might not weight so much for the foreseeable future.

4) As recycling of gold represents 40% of total supply over the last five years, the first 6 months of 2013 showed a considerably drop in supply due to this cause. The decreasing in offer was also caused by the slowdown in the mining activity.

Much Ado About Nothing

Today Mario Draghi had to fight with the same rush of the investors that Ben Bernanke encountered yesterday. Everybody was interested in any major change that could happen in the short term, like the possibility of modifying the interest rate. As just last month was announced that they would maintained the low interest rate for an “extended period of time” it’s logical that no important changes were expected today, especially because the economy didn’t report major changes (like the inflation exceeding the 2% threshold). To sum up, a trace of optimism was kept, as the economy is expected to recover at a slow pace.

The U.S. data maintained the optimism of the last days as the ISM Manufacturing Index achieved a rating of 55.4 points (as last month got 50.9 points). The manufacturing industry is gaining momentum and pledges to sustain further positive numbers for the indicators of the labour market. Speaking about the labour market, this month were registered fewer unemployment claims (326k), value that reaches a minimum level of May 2013. Likewise, an extra vote was added for the QE3 tapering that is due to happen in September. Gold price is likely to remain in the last 2 weeks’ range at least until a final decision is taken regarding the moment of taper of the monetary stimulus program.

Is Gold going to Rally Back to 1300$ per Ounce?


Chart: GOLD, H4

As it looks now, in our opinion, the answer would be not yet. The FOMC meeting minutes showed that there are more members that agree with the tapering of the Quantitative Easing program, but it wasn’t specified the date for the start of the tapering. The speculated date was September this year, but it seems that the Federal Reserve has to see whether the unemployment rate is heading to 7%.

After the Minutes the dollar lost some ground, gold rallied to 1265$ per ounce but didn’t stay too much there. In less than an hour Ben Bernanke will have a speech and the investors will keep their eyes and ears focused on what the Fed’s chairman is going to say.

From the technical point of view, the price of gold encounter a good resistance area at 1268.00 level, that was tested 2 more times in the past 3 weeks, and could not pas. The bounce off 1265$ might mean that the pressure is still on the downside, even though it can be spotted an Ascending Triangle price pattern on the chart.

To wrap it up, during the speech of Bernanke we will look at the support 1243.30 and resistance 12568.45 key levels. Under the support the targets will be 1220.00, 1200.00 and 1180.00, while above resistance the price targets would be 1302.45 and 1350.00.