Gold ETFs are in a holding pattern as investors look for hints of more quantitative easing from the Federal Reserve.
Gold remains above its key 50 day-moving-average, but is trading tentatively ahead of key policy meetings. The release of the June FOMC minutes last week was underwhelming in terms of a clear QE signal, disappointing gold bulls.
However, the door was clearly left open, with FOMC members highlighting that if US economic activity deteriorates further they are “prepared to take further action as appropriate.”
With interest rates near zero, it would appear that “unconventional” monetary policy is the likely next step. As such, Bernanke’s upcoming Congressional testimony on the US economy on Tuesday and Wednesday has the potential to signal what the market hoped for from the last FOMC meeting.
With gold one of the perceived few hedges against further US dollar debasement, any hints of a potential third round of quantitative easing will likely be bullish the gold price.
Silver prices will likely follow gold’s lead in coming weeks, with the correlation between the two precious metals the highest in six weeks.
Gold and US Dollar correlation at highest level in 4 months
US dollar strength continues to hamper the performance of precious metals, gold in particular, with the negative correlation between the two assets standing at -0.5, the highest level in 4 months.
When gold is moving inversely to the US dollar, it naturally trades in a less reactive manner to systemic risk in Europe.
Politicians were predictably silent on details of the proposed European bailout structures after last week’s European finance ministers meeting, giving little in the way of directional cues for gold.
The effect of US dollar strength on the gold price can clearly be seen looking at gold in US dollars compared to gold priced in Euros.
Key events to watch this week
Economic data releases are fairly light this week, with US industrial production, retail sales and housing data likely the main focus.
Fed Chairman Bernanke’s testimony to Congress will be the main event for precious metals investors, with any hints of openness to QE3 likely adding support to prices. [Gold ETF Weakness Explained]
Movements in the US dollar will also likely continue to have a strong effect on precious metals prices, with developments in Europe playing the dominant role.
ETFS Physical Swiss Gold Shares (SGOL)