Let’s just start by saying this-gold has had better weeks. In what has been a difficult week for the yellow metal, gold now appears to be poised for another significant leg lower in price. Today’s action by the Bank of Japan may have sealed gold’s near-term fate.
To put the week for gold into context, the metal traded above the $1230 level earlier in the week. The FOMC announcement on Wednesday did not do the gold bulls any favors, however, as the Fed ended its QE program while leaving its language on short-term rates unchanged. Stocks sold off a bit on the news, while the dollar rose and gold prices fell. What was perhaps the most noteworthy aspect of the Fed announcement was the upbeat nature of the comments. The Fed seemed to sound a lot more optimistic and did not appear to be too concerned about low inflation, slowing global growth or recent stock market volatility. All in all, this was a much more hawkish Fed than expected.
The Fed announcement drove gold prices lower and in follow through selling yesterday, gold prices once again breached the $1200 level on the downside. In what may have been the straw that broke the camel’s back, the Bank of Japan unexpectedly voted to expand the pace of its quantitative easing program by about 30 trillion yen from the previous pace. The BOJ cited concerns over slowing inflation and falling crude oil prices among other things.
The move by the BOJ caused both Japanese and U.S. stocks to soar. The Dow Jones will likely hit a new record today while the SP500 is also within reach. Further easing by the bank may fuel further appetite for risk assets and stocks could begin another leg higher following recent volatility. Conversely, perceived safe haven assets such as gold may stay under pressure.
The rising U.S. dollar index has been a large factor in gold’s failure to piece together a sustainable rally. Today’s move by the BOJ has caused the Yen to drop while strengthening the dollar. In fact, the greenback has now taken out its high from the first week of October and appears to be headed for another leg higher. This comes as the U.S. economy continues to strengthen while the Euro zone and Japan continue to struggle. Ongoing strength in the dollar may keep pressure on gold and precious metals for the foreseeable future.
Gold has broken support in the $1183 area and has completed a bearish descending triangle pattern. While nothing is ever set in stone, the current technical picture in gold could potentially indicate further downside in prices, and the notion of $1000 per ounce gold is a distinct possibility.
