The gold market is finally showing some real signs of strength this week. Gold prices are higher by a few dollars per ounce today following yesterday’s strong showing finishing up well over $20 per ounce. Gold made a bullish outside day on the daily chart and has now cleared the December highs. This could very well set the stage for a sizable rally. The question many people may be wondering right now is what is driving this current rally?
QE Removal May Spell Doom For Stocks
While it seems that the notion of the Fed removing its bond buying program has already been largely discounted, stocks are beginning to look a little skittish here. This could be due to the patch of worse-than-expected data that has been seen recently or it could be due to investors getting nervous about the prospects of stocks continuing higher in light of the Fed removing the punchbowl. Either way, it seems that stock weakness may be a gold positive here.
Overly Bearish Sentiment In Gold
It seems that with every new day lately another bank is downgrading their outlook on gold for this year. People have been bearish on gold based on the notion that the Fed ending QE may boost the dollar and that inflation is non-existent. As we have seen in markets time and time again-when everyone gets on one side of the ship the ship usually capsizes. This could certainly prove to be the case with gold. There are still a lot of shorts in the gold market-and should the rally in gold begin to rattle more of those shorts out of the market we could see prices sharply higher than where they are today. Overly exuberant sentiment either bullish or bearish tends to correct itself over time. Perhaps we will see this occur in gold.
Physical Buyers
Physical buying in gold and silver remains strong. It is not off-the-charts currently but has remained robust and consistent. Many investors appear to be viewing recent weakness as an opportunity to buy gold on sale. We do not expect the trend in physical buying in gold to change much-if anything, we feel that we could see demand pick up even more. This demand for physical gold should help keep a floor under prices.
This past week has been a key victory for the gold bulls. Now we have to see whether or not the momentum can be sustained. With a Fed meeting next week, it seems that the gold bulls are quite confident even if the Fed tapers further. Investors will likely continue to watch the data stream and the equities markets for cues. In the meantime, gold will likely set its sights on the $1289-$1291 area as a next target.
