Gold has seen some decent selling pressure this week following the FOMC announcement on Wednesday afternoon. After rallying from a swing low in the $1250 area in the middle of last month, gold prices saw some fresh buying enter the market as shorts covered and the budget crises caused some safe-haven buying. Prices topped out however, in the $1361 area and now look poised to start trending lower again on the daily time frame.
Obviously the FOMC announcement has been the largest driver of gold prices this week. While the central bank has said that the economy remains to weak to begin tapering, its comments were perceived as being more hawkish. This hawkish tone set the stage for a large rally in the U.S. dollar index. The dollar index is something we have discussed in many previous posts, and although the greenback looked headed for more downside, it has put together a very impressive rally this week.
In fact, the dollar was moving higher even before the Fed announcement but has gained additional steam following the announcement. Yesterday, the index blew back above the 80 level which likely caused a large amount of short covering. As of this post, the dollar is trading above its 9,20, and 50 day EMA’s which could attract further strength. With whispers of the EU possibly lowering interest rates again, the dollar may be well supported in the near term. Should the dollar continue to strengthen, gold prices will likely remain under pressure and could even head for a re-test of the October lows.
Whether or not this rally in the dollar is truly sustainable remains anyone’s guess. It is important to keep in mind that several of the factors that drove the dollar lower recently may still come into play again in the near future. The debt ceiling and budget crises will be revisited in the new year. The economy continues to struggle. If or when these issues come back into focus, it could potentially boost gold while weakening the dollar.
The price action in gold has been a little surprising. By the fed’s own admission, the economy continues to struggle and therefore QE will continue for now. It seems however, that investors are content continuing to buy stocks and risk assets and sell perceived safe-haven assets such as gold and silver. Many believe that stocks are setting up for a crash, and should that type of scenario occur we believe that gold could be bought as investors scramble to take money out of stocks and put it to work elsewhere. For now, QE will go on and investors will closely monitor the data stream.
Gold has now moved back below the 9,20 and 50 day EMA’s on the daily chart. It is likely that the $1300 area will now be tested with $1275 as next support below that. The market is now in a more sideways posture on the daily time frame going back since September. At this point investors just have to wait and see who can take control here-the bulls or the bears.
