Gold Rally at Risk Ahead of Fed’s Beige Book, Bernanke Testimony
Fundamental Forecast for Gold: Bearish
- Gold, Copper Rise as Bernanke Cools QE Cutback Bets
- Gold Rally is in 2 Equal Legs; Watch Near Term Channel for Support
- Gold Prices Might Shine Again as Sentiment Turns
Gold is firmer this week with the precious metal rallying 4.74% to close at $1280 in New York on Friday, its largest weekly gain in nearly 2 years. The advance comes amid a larger correction in the U.S. Dollar which came under tremendous pressure mid-week after the release of the minutes from the latest FOMC meeting and subsequent comments from Federal Reserve Chairman Bernanke. Market participants slammed the greenback on Wednesday evening after the chairman noted that the central bank needed to keep and accommodative monetary policy stance in place given the lackluster improvement in the labor markets and continued low inflation. However as US economic data continues to improve, it will be difficult for the central bank to justify continued QE operations- a likely bearish outlook for bullion.
Looking ahead to next week, the Humphrey Hawkins testimony and the Fed’s Beige Book represents the largest event risk for gold traders. With market participants remaining rather sensitive to “taper talk,” all eyes will be on Fed Chairman Bernanke as he delivers his semi-annual testimony before the House Financial Service committee on Wednesday and the Senate Banking Committee on Thursday. Investors will be looking for further details as to the central bank’s exit plan as the Fed anticipates a stronger recovery in the second-half of the year. At the same time, the Fed’s Beige Book release next week should also shed some light as we get the updated assessments from the Fed’s twelve districts. Should the report highlighted an improved outlook for growth and inflation, look for gold prices to remain under pressure as expectations for cessation of QE operations later this year begin to take root.
From a technical standpoint, the gold rebound off key Fibonacci support last month at $1181 achieved a 100% extension (two equal legs up) at $1295 on Thursday before falling back to interim support at the 61.8% retracement taken form the April 2009 advance at $1268. Price action has remained within the confines of a well-defined ascending channel formation since the June low. It’s worth noting that a look at historical price action reveals key lows in April for the past 4 years and the possibility for further advances mounts with a breach above $1295. Such a scenario eyes topside resistance targets at $1349 and $1393- $1397. The broader bias remains weighted to the downside below this mark however with a break below interim support at $1268 targeting the 38.2% retracement off the June lows at $1253, $1225 and the April lows at $1208. Bottom line: topside in the near-term remains a risk with rallies offering favorable short entries. -MB