Posted on November 21, 2014
Gold prices are moving higher as world markets react to news that the Central Bank of China cut interest rates. The move came as a surprise, although Chinese economic data over the last several months has generally been a let-down. In addition to the rate cut by China, the ECB is also in the headlines as bank president Mario Draghi reiterated that the central bank will do whatever is necessary to reach its inflation target. This could include various measures such as additional quantitative easing. The ECB also reinforced the notion that it is ready to act rapidly if necessary.
The news is bullish for commodities and risk assets. Stocks and commodities are moving higher this morning in spite of a sharply higher dollar index. U.S. stocks are hitting new records, and appear to be poised to continue in their winning ways for the foreseeable future. This could potentially continue to weigh on gold prices.
Markets have gotten a fair amount of data to digest this week. One of the data highlights of the week was Wednesday’s release of the latest FOMC meeting minutes. Although the release was largely a non-event in terms of market reaction, it did provide some important pieces of information.
The Fed reiterated that the first interest rate hike will be data dependent. There was also some talk of removing the phrase “considerable time” from the Fed’s statement. The Fed also discussed what it considers to be some headwinds coming from Asia and Europe. In addition, the Fed feels the labor market is still sluggish and that inflation is running too low. This is essentially more of the same from the Fed, and while it appears that the first rate hike will come in 2015, the central bank appears to be in no rush to start tightening.
The stronger dollar continues to be a barrier to higher gold prices. The greenback is beginning to look a bit tired and has been consolidating recently near four year highs. While the dollar could begin another leg higher, one has to wonder at what point the greenback may run out of gas. Investors will be watching the ECB closely. Should the ECB undertake further large-scale QE or other measures, there is the possibility that the Euro currency may find a bottom at some point.
Gold still has a lot to prove but the short-term technical picture is improving. The market is once again back above the $1200 level and appears poised for further upside. The market has made a few higher-highs and may be headed for first resistance in the $1220 area.