Gold prices are trading sharply higher today as some bargain hunters have entered the market following Friday’s sell off and some shorts cover positions. In addition, the ongoing unrest in Egypt is likely fueling some safe haven demand in the precious metals complex.
The sell off in gold following last Friday’s non-farm payrolls data was not unexpected. The fact that the number came in better than expected and that prior numbers were revised higher simply added some credibility to the notion that the Fed will be taking a more hawkish approach to policy and doing so on a quicker timeline than previously thought. The numbers may not however, be as good as they seem.
Without getting into dissecting the data, there are obviously some differing schools of thought on the report and how the Fed may now proceed. Some experts think the economy is still too fragile for the Fed to begin taking its foot off of the gas. Others feel that removal of the punchbowl is long overdue. In fact, there is talk circulating of the Fed pulling back as early as September.
This Wednesday, the markets will get the latest release of the FOMC minutes. This release will be followed by Ben Bernanke speaking. Between the two, the markets will once again be looking for more clarity on policy going forward. Whether or not the markets get that clarity is an entirely different story. This will likely be the highlight of the week announcement wise, as this week is light in terms of data.
The gold market, and investors in general, will continue to monitor the situation in Egypt closely. Escalation in the region could add to gold’s appeal as investors seek out perceived safe havens. With the exception of the current situation in Egypt however, the gold market still seems to be missing a strong catalyst to drive prices higher. Physical demand has picked up a bit, but is not seeing levels seen in April. Buyers may still be anticipating lower prices.
Oddly enough, perhaps the single biggest thing gold has going for it right now is the degree of bearishness surrounding it. Markets have a funny way of shaking people out of a crowded trade, and the short trade in gold is still quite crowded. The market also appears to be making an attempt today to start working off an oversold condition. Should the gold market continue to rally a bit more shorts will get squeezed out and prices could move quite a bit higher as the market enters a period of consolidation before deciding its next move.
