Gold Price - Long or Short: A Great Opportunity

Gold Price - Long or Short: A Great Opportunity

The gold market took a distinctively bearish view of the news this week from both the Fed and ECB.  After last week’s gains off of the back of Draghi’s comments to support the Euro at whatever cost, the gold price this morning stands at $1590 which is nearly $40 short of its high at the end of last week.

The market had priced in an expectancy of some firm direction with regards the timings of the next round of stimulus, but both Bernanke and Draghi stopped short of that.

The indicators for some forms of stimulus packages being inevitable definitely increased, which is why the support around $1580 - $1590 held after a test on Thursday afternoon following the ECB press conference.



In the FOMC minutes, the language subtly shifted with the phrase "will provide additional accommodation as needed" being used, as opposed to "is prepared to take further action", which is what was said in June.  As it happens, and probably not by chance, the wording of the July phrase is very similar to the wording of the September 2010 FOMC statement before announcing QE2 in early November.

Many analysts think that the announcement will be made at the Fed’s meeting in Jackson Hole, Wyoming, on the 31st August; however there is a view that this may be yet another damp squib as the Fed has a habit of not announcing anything which will rock the markets in the run up to elections – so with the US mid-terms are happening in November we could see a holding pattern develop unless there is a really major economic set-back before then.

Draghi’s comments had the most impact, although they didn’t really amount to much.  The expectancy was high, after Draghi told an investment conference before the Olympics that "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” But all that statement really did was to paint him into a corner where the markets had rose in expectancy only to be disappointed with another round of rhetoric from ECB directed at the seemingly leaderless EU.

The initial plan is for the Eurozone governments to utilise existing rescue funds before the ECB will intervene further.  There were some strong words said about the Euro being irreversible and it being pointless to go short on the Euro, but very little by the way of concrete action plans and a sign that the Eurozone has got it together yet.  It still represents the major risk to the global economy.

The next big news is lunchtime today with the US non-farm payroll data being released.  If this shows a decline in jobs then expect rises in the gold market and possibly a statement or indication from the Fed that stimulus is likely to be sooner rather than later.  If jobs news is strong, expect the reverse.

On the technical side of things, we’re really in a “no-change” position from the position we've been stating for the last few weeks.  There have been trading opportunities, but the next big moves will be dependent on breaking out either above the $1630 level or below $1525 – obviously there will be short-term opportunities within that range whilst the market makes up its mind on the medium-term direction.

The $1525 low that has been tested three times since the record high in Sept’11 happens to be the 23.6% retracement of the major bull market move from Sept ’99 to Sept 2011 – this level has been a rock solid support point, but if it is broken there is nothing beneath it other than round numbers all the way back to $1280ish.  Of course there will be rises and falls along the way, and a new round of QE will likely arrest any major decline – but if the support at $1525 gives way then we are betting the house on a big move south.

Similarly, a convincing breakout above the $1630 - $1640 resistance would indicate to us that the next big bull wave is forming and once $1680 is cleared, there is little resistance all the way back up to $1800.  If this move is off the back of an announcement, followed closely by implementation of QE3, then expect gold to surpass its previous record high in a move well beyond the $1900 level.

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