Posted on January 16, 2015
Gold prices are moving higher again this morning as risk aversion continues to take hold. Yesterday’s move by the Swiss National Bank to remove the franc’s peg to the Euro caused selling in stocks and buying in gold and treasuries. The Euro currency sank while the Swiss franc rose 30 percent against the shared currency. Unfortunately for many, volatility spiked and liquidity dried up as wholesale banks stopped quoting the franc. Traders and trading firms were stuck with no way to exit positions as losses continued to mount. In addition, the heavy leverage provided to currency traders-sometimes as much as 100:1, only exacerbated the situation.
In the aftermath today, several currency brokerages are said to be insolvent, and one of the larger firms, FXCM, is said to be trying to shore up its capital as the company said that losses left it with a negative equity balance of about $225 million.
It is believed that the SNB acted in anticipation of the ECB announcing a major QE package next week, and that the bank felt it would not be able to defend the 1.20 francs per euro cap.
U.S. inflation data released this week came out essentially meeting expectations. The data showed a softening in prices at the producer level as well as the consumer level. Needless to say, the drop seen in energy prices in recent months is playing a role in softer prices.
The fact that inflation still remains very tame and below target does beg the question: Will the Fed still hike rates with no inflation? While the central bank has alluded to raising interest rates this year, the lack of inflation may keep the central bank from acting-at least for now. It appears that the inability to stoke inflation is slowly replacing labor market weakness as the primary reason that the Fed may reconsider its plans. While the gold market appears to have already discounted higher rates, the notion of the Fed remaining on hold could potentially boost buying interest.
The tide has turned for gold from a technical perspective. After bottoming out in November, the yellow metal has been trending higher and is now showing further signs of strength. Gold prices blew through resistance in the $1240 area yesterday like a knife through warm butter, and it would seem that the bulls will target the $1300 level next.
The strength being seen in gold currently is particularly noteworthy given the ongoing slide in crude oil prices and dollar strength. The fact that gold is moving higher in spite of some very bearish outside market forces could be indicative of underlying strength-and the potential for significantly higher gold prices.