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Gold Breaks Key Support Following FOMC- $1273 Remains Critical

Gold Breaks Key Support Following FOMC- $1273 Remains Critical

Michael Boutros, Strategist
Gold_Breaks_Key_Support_Following_FOMC_1273_Remains_Critical_body_Picture_1.png, Gold Breaks Key Support Following FOMC- $1273 Remains Critical

Gold Breaks Key Support Following FOMC- $1273 Remains Critical

Fundamental Forecast for Gold: Neutral

Gold plummeted this week with the precious metal off by more than 7% as investors turned sour on the prospect of Fed tapering. While our longer-term bias has remained weighted to the downside, the risk of a near-term correction higher now mounts after tagging key technical support. So is it time to start buying? The next few days will be the ‘tell’.

The FOMC rate decision on Wednesday sparked a massive sell-off in broader risk assets with commodities falling across the board as Federal Reserve Chairman Ben Bernanke attempted to outline the central bank’s plan for winding down QE operations. The chairman cited that, “If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year.” The remarks fueled a mass exodus out of the precious metal as the US Dollar rallied on expectations that the Fed is likely to put an end to easy money sooner than anticipated. The subsequent decline in gold prices broke through key support levels to close out the week just below the $1300 threshold. The losses mark the largest weekly loss since the April break below $1555 and the lowest levels seen since September of 2010.

Looking ahead to next week, traders will be lending a keen to central bank rhetoric with voting members William Dudely, Jerome Powell, and Jeremy Stein speaking next week. As market’s digest this week’s FOMC policy announcement, investors will remain rather sensitive to interpretations of how/when the central bank will look to taper its current $85 Billion asset purchase program. As such, look for prices to take cues to broader market sentiment with the risk of a near-term correction higher likely if key support holds early next week.

From a technical standpoint, gold has now completed a 100% extension of the decline of the May highs and risk for a rip higher mount so long as the $1273 support level is respected. This week’s sell-off was a definitive break of a multi-month long consolidation pattern noted in last week’s report and while a measured move does point to further losses, broader extremes in sentiment indices (DSI below 10% bulls) suggests that prices may correct higher into the close of the month. The possibility for a break lower into the $1245 support structure remains, but losses past this threshold are likely to be limited at this time. Look for pullbacks to offers favorable long entries on medium-term positions eyeing topside target ranges at $1331-$1340 and $1356. Bottom line: although the broader fundamental outlook remains bearish, the likelihood of a near-term recovery has us looking higher. . For now. . -MB

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