The reason why I will be watching gold is for a few reasons:
- Over the last week I have read nothing but “bullish breakout” analysis on gold and I have a feeling at this point the market is long (near term).
- Gold has been a great “tell” for more QE, or no QE in recent months.
- As a currency trader, the shiny metal will influence what decisions I make in the currency market, especially regarding the USD pairs.
Technically, let’s look below:
1. As you can see, the near term “triangle” pattern had been broken, and although the predominant trend has been down over the last several months, traders insist this is a bullish breakout. However (as noted below on the weekly chart) the bearish wedge is more impactful in my view.
The problem here is that the projections for a move back towards 1700 could come up short after today’s meeting of the Federal Reserve. I would venture to guess all the short term bulls have their stops nestled somewhere below 1590(ish). Wouldn’t you?
So why do I say that a move towards 1700 could come up short?
2. Although expectations of the Fed has been ratcheted down over the last week (as the QE hawks were circling the bandwagon last week) I think most traders forgot what the Fed Chairman (during his semi annual testimony) said a couple weeks back of monitoring “jobs” for the next couple months before deciding further monetary action.
But I ask myself “what could leave the QE hawks flatfooted?” In recent days, analysts have built up expectations that the Fed will at least adjust it’s projections of “exceptionally low levels of the federal funds rate through late 2014” to “exceptionally low levels of the federal funds rate through (somewhere in) 2015.”
What if they don’t? What is they don’t change their statement from last meeting? The problem is that expectations of QE3 the next meeting may be diminished. Hence, gold (as a QE predictor) may slump towards 1550 trend line support.
3. As a currency trader, if gold slumps one of the best long standing correlations is gold/USD. If gold sells off, I would then turn to USD longs against a basket of currencies. And most of you know, if the USD rallies, then stocks…
On balance, if the Fed meets expectations that the market set fourth, then gold should have a nice bounce off the 1600 level and equity markets may continue its rise into tomorrow’s ECB meeting. “Enter the Dragon….err….Draghi”
Disclaimer: I have no position in gold and do not plan on it over the next 24 hours. USD? Well, that is a different story.
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