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Gold Outlook Uncertain as Markets Price in the End of Quantitative Easing Round 2

Gold Outlook Uncertain as Markets Price in the End of Quantitative Easing Round 2

2011-06-10 22:53:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Gold

Gold/USD NY Spot Close 1531.68

Gold_Outlook_Uncertain_as_Markets_Price_in_the_End_of_Quantitative_Easing_Round_2_body_xauusd_risk.png, Gold Outlook Uncertain as Markets Price in the End of Quantitative Easing Round 2

Gold Outlook Uncertain as Markets Price in the End of Quantitative Easing Round 2

Fundamental Forecast for Gold: Neutral

Gold ended the week just over 2.0 percent lower, as markets began pricing in the end of quantitative easing round two following Federal Reserve Chairman Ben Bernanke’s commentary at a conference in Atlanta, Georgia on Tuesday. While a decline in Gold and other precious metals usually fall in line with a shift to risk-appetite, such was not the case this week, as risky assets on the whole, including equity markets, finished the week lower than where they started as well. That being said, it appears that investors are winding down their exposure to commodities and equities the past week, given that a draw down on liquidity by the world’s central banks would ultimately reduce the potential for inflation, and accordingly, the need for Bullion as a hedge against price pressures. Overall, the precious metal was able to hold above the $1530.00 price level, a range it has failed to close below since May 26.

The week ahead, fundamentally, there exits arguments for further gains or further losses in the precious metal. While tensions remain high in the Middle East and North Africa region, the full effect of the continued conflict seems to have been priced in already, considering that as the fighting ensues in Libya, violence has erupted in Syria, and yet, the commodity markets have barely reacted. That being said, with rumors afoot that Colonel Gaddafi could be negotiating a cease-fire or even safe haven outside of Libya, commodities could see relief across the board as conflict in a strained region moves towards a more relaxed state.

On the other hand, it was clear that of the four central banks to hold rate decisions this past week, three – the Bank of England, the Reserve Bank of Australia and the Reserve Bank of New Zealand – signaled that their respective overnight benchmark rates would remain on hold for some time. As further liquidity floods the markets, inflation could once again rear its head. The effects of such liquidity will be revealed over the course of the next, with the Euro-zone, the United Kingdom and the United States all releasing their respective consumer price indexes this week, and signs of price pressures could spook investors back into precious metals as a hedge against said inflation. Moreover, if the most recent slowdown in equities is, in fact, an indication that the global economy is cooling once more, Gold could see another bounce on a shift to using Bullion as a store of money rather than fiat currencies.

On a technical basis, Bullion continues to hold above its 20-SMA, and remains in the upper-half of its ascending channel that has been in place since November 9, 2010. However, the technical indicators are not encouraging. The RSI continues to fall, suggesting further losses on the horizon before a rally once more, now at 55 on the daily chart. Similarly, the precious metal’s Slow Stochastic oscillator has issued a sell signal, with the %K less than the %D, at 73 and 80, respectively. The MACD Histogram is now diverging bearish, though the differential remains soft at -3. Certainly, with the proper fundamental backdrop, the technical picture points towards further losses for Gold in the week ahead. -CV

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