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Gold Outlook Turns Increasingly Bearish As Fed Talks Down QE3

Gold Outlook Turns Increasingly Bearish As Fed Talks Down QE3

2011-12-16 23:46:00
David Song, Currency Strategist
Gold_Outlook_Turns_Increasingly_Bearish_As_Fed_Talks_Down_QE3_body_Picture_5.png, Gold Outlook Turns Increasingly Bearish As Fed Talks Down QE3Gold_Outlook_Turns_Increasingly_Bearish_As_Fed_Talks_Down_QE3_body_Picture_6.png, Gold Outlook Turns Increasingly Bearish As Fed Talks Down QE3

Fundamental Forecast for Gold: Bearish

Gold continued to selloff in December, with spot prices falling to a three-month low of $1,561, and the bullion is likely to weaken further as market participants diversify away from the precious metal. Increased demands for the U.S. dollar has certainly taken a toll on gold, and we are likely to see lower prices in the week ahead as the Federal Reserve talks down speculation for another large-scale asset purchase program.

Indeed, the Federal Open Market Committee struck an improved outlook for the world’s largest economy after maintaining its current policy stance in December, and we may see the central bank continue to soften its dovish tone for monetary policy as Fed officials expect the economic recovery to gradually gather pace in the following year. Although the Fed continues to highlight the ongoing weakness within the real economy, it seems as though the central bank will preserve a wait-and-see approach throughout the first-half of 2012 as the risk of a double-dip recession subsides. Following the rate decision, Dallas Fed President Richard Fisher said that he would vote against another round of quantitative easing ‘if it’s put on the table,’ and went onto say that the FOMC could start normalizing monetary policy as growth prospects improve. However, as Fed Chairman Ben Bernanke maintains a cautious outlook, we could see a growing rift within the committee, and the central bank head may keep to door open to further stimulate the economy in an effort to encourage a more robust recovery.

As market participants becoming increasingly bullish against the USD, gold price may come under increased pressure next week, but the bullion looks poised for a short-term correction as the relative strength index bounces back from oversold territory. In turn, we may see the precious metal climb back above the 100-Day SMA around $1,620, which could pave the way for a test of former support around $1,670. Nevertheless, growing demands for the reserve currency is likely to limit the upside risk for the precious metal, and we expect to see lower prices in 2012 as the gold bubble bursts. - DS

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