After posting strong gains on Monday, the gold bulls appear to have run out of gas-at least for now. Gold prices are set to finish the week higher however, and should they do so it would be the third consecutive week higher for prices. This past week was relatively light data wise however, the data that was released continues to show an improving economy.
All things being equal one has to wonder at what point the Fed will decide enough is enough with regards to its quantitative easing program, and that decision could come as early as September. In fact, there are whispers swirling of the Fed announcing a cut in its stimulus starting in September. This cut could be a reduction in the Fed’s monthly bond purchases from $85 billion per month to $65 billion per month.
Exactly how this might affect markets remains unclear however, it is possible that buying interest in stocks and other risk assets could take a hit as nervous investors worry about the economy’s ability to stand on its own two feet. The gold market seems to be in a a bit of a holding pattern here, and it is quite likely that gold investors are awaiting more clarity on QE issues before making any substantial moves.
Gold challenged its key 50 day EMA this week and thus far has failed to clear this important level of resistance. Just because it failed the first time does not mean it will not try again however. Gold prices are trending higher on the shorter time frames and the benefit of the doubt here should go to the bulls until the bears prove otherwise.
A large short position still remains in gold and precious metals, and we still feel that should a sustainable rally ensue that those remaining shorts getting squeezed out could help fuel gold prices higher by $100 per ounce or more. Gold continues to be criticized in the media and despite the recent rally sentiment still appears to be very negative. We feel it is overly negative and that because of this the likelihood of a rally increases.
This past week demand for physical gold bars and coins remained steady, and we feel that should price continue to move higher an influx of fresh buyers will be seen. Gold prices are also still holding above a 50% retracement of the move higher that was seen since 2002, and for the long term investor this could potentially still be a great opportunity to add to physical holdings.
