Without question this was certainly an entertaining week in the precious metals markets and in gold specifically. The market displayed a good deal of volatility throughout the course of the week. Gold had a lot to digest the last few days including testimony from Fed chief Ben Bernanke, readings on weekly jobless claims, and the Friday sequester which has now come and gone without the meltdown on markets that many had anticipated.
Gold has remained under pressure for the most part, and there could be numerous reasons for this. The yellow metal is a very interesting asset in that sometimes it will be traded as a currency, sometimes as a flight to quality instrument, and finally sometimes it’ll trade as if it is just any other risk asset out there.
Well what appears to be happening currently is that risk assets in general are being bought at gold’s expense. Now certainly given our fragile economy and many worldwide pressures including the threat of slowing in China and continuing problems in Europe regarding the debt crises, one would not expect this trend to continue indefinitely.
It is, however, impossible to tell when this euphoria may wear off and a more realistic view of the current state of the global economy sets in. This is not intended to be of a gloom and doom type of mentality, rather it is intended to focus on fundamentals.
The recent data stream has continued to show improvement in readings of jobless claims and manufacturing. Perhaps things truly are moving in the right direction economically. Things are, however, moving very slowly. This is why Ben Bernanke reiterated this week that the fed’s punchbowl is here to stay for the time being.
Bernanke knows that without the stimulus provided the economy is not strong enough to stand on it’s own. This could be what reverses the current trend in gold. Should the equities markets and risk assets put in a top around current levels, that could spur flight to quality buying in gold that has been lacking recently.
For now, gold is being sold to attempt to capitalize on potentially higher returns elsewhere. Obviously, should markets top here that herd mentality would likely change very rapidly. Once again nervous investors may look for alternative places to park their money- and gold would be a very likely candidate for a lot of that cash.
From a technical standpoint, the bears maintain the near-term technical advantage. The recent swing low of April gold futures at $1554 ish is still a likely target on the downside although the market did get close during Friday’s session printing a low of $1564. This area could prove to be a buyable dip. We shall see. The bulls have their work cut out for them, and need a strong close above the psychologically important $1600 level to get additional upside going in the short-term.
