Gold Break-Out Fueled by QE Expectations- All Eyes on Jackson Hole
Fundamental Forecast for Gold: Bullish
- Gold Triangle Breakout Objectives at 1700 and 1750
- Crude Oil Sold on Japan Export Drop, Gold Supported Before Fed Minutes
- S&P 500 Tumbles as US Dollar Chart Setup Hints at Rebound
Gold is markedly higher at the close of trade this week with the precious metal surging 3.37% by the close of trade on Friday. The FOMC minutes coupled with rising expectations for further easing from global central banks have fueled a massive rally in gold with further gains likely in the weeks ahead. However with the Jackson Hole symposium on tap for next week, topside advances may be limited over the next few days as market participants look for clarity amid the ongoing shift in policy outlooks.
The release of the FOMC minutes from the August 1st policy meeting was the highlight of the week with gold prices reacting decisively to expectations for further Fed easing. The minutes cited that “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.” Markets aggressively turned on the US dollar with gold prices soaring to fresh 4-month highs above $1670. Although Federal Reserve Chairman Ben Bernanke has already stated expectations for modest, lackluster growth in the months ahead, its seems as though another round of central bank easing is at hand with investors flocking into the yellow metal as a traditional means of hedging inflationary pressures.
The much anticipated Economic Policy Symposium in Jackson Hole, Wyoming will be central focus next week and the fresh batch of central bank rhetoric coming out of the conference is likely to heavily impact gold prices as market participants weigh the prospects for future monetary policy. However, should Fed Chairman Bernanke refrain from hinting at QE3, the recent advance in gold could be at risk and we may see a sharp reversal in bullion as investors scale back bets of another large scale asset purchase program. Indeed St Louis Fed President James Bullard argued that the FOMC minutes were a bit “stale” as it failed to take into account the recent batch of improving US economic data and we may see the central bank strike a more neutral tone for monetary policy as the recovery slowly gathers pace. Still, it is becoming more apparent that the board is in fact leaning towards further liquidity injections and as such, gold’s break-out this week may just be the start of another multi-month rally.
From a technical standpoint, gold has made substantial progress this week with prices breaking out of a near 4-month long triangle formation as expectations for more central bank easing take root. Gold breached above the 200-day moving average at $1644 and long-standing trendline resistance dating back to the all-time highs set back in September before closing out the week just below the May highs at $1671 with an RSI break above trendline resistance dating back to the June highs confirming the break-out. Although the break signifies a clean technical reversal, the Jackson Hole Economic Symposium does present substantial event risk and if policymakers fail to satisfy market expectations for more easing we could see gold take back a portion of this week’s rally. As such we remain cautiously bullish with investors advised to reduce holding’s heading into Friday when Bernanke takes the stage with ECB President Mario Draghi following on Saturday. Daily support now rests with the 100% Fibonacci extension taken from the May and June troughs at $1662 backed by the June high at $1641 and the July high at $1630 with only a break below August 15th low at 1590 invalidating our directional bias. A break above Thursday’s high of $1675 eyes subsequent topside targets at the April High at $1683, $1700, and the 161.8% extension at $1733. Note that daily RSI has now broken above the 70-overbought threshold for the first time since early February with a pullback of some magnitude likely to offer fresh long entries. -MB
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