Gold prices are seeing a modest bounce thus far on Friday following yesterday’s steep losses. Today’s bounce can likely be attributed to short covering and bargain hunters emerging once again. The gold market began the week on a good note, showing some decent gains on Monday and Tuesday this week. The market has however, once again failed to be able to extend the rally into a more sustainable buying spree.
The talk of the town continues to be next week’s FOMC meeting. While many have grown tired of the ongoing debate on whether the Fed will taper or not, this issue does remain at the forefront for investors. Not only could tapering by the Fed affect the metals markets, it could also potentially cause selling in equities and other risk assets. Furthermore, it has the potential to cause the dollar to reverse course and start heading higher again which would be a negative for the precious metals complex. There has been much debate over just how much volatility could potentially enter markets if the Fed does take action next week.
While anything is possible, the notion of extreme volatility in light of any fed action seems a bit far-fetched. It’s not as if this is “news” to market participants, and the move has been expected for some time now. Should the Fed taper next week, it may simply prove to be a complete non-event. On the other hand, if the Fed does nothing again, it could spark a temporary rally in gold and silver and perhaps a blow-off type of rally in stocks.
Gold is not getting any help from its friends today. The dollar index is trading higher while crude oil is moving lower. Stocks are trading slightly higher in quiet trade thus far. We suspect that as long as stocks stabilize here and do not continue to slide, selling pressures may continue in gold. The ongoing bull market in equities appears to be one of the keys for the gold market and a potential recovery in gold prices. Should stocks turn South, gold could benefit as investors look for alternatives.
Gold has failed to maintain trade above its 9 and 20 day EMA’s this week. If gold takes out last Friday’s lows around the $1209 area, then the stage is set for another test of $1182. While last week’s lows may be met with bargain hunters, volatility and position squaring ahead of the FOMC next week could cause some erratic price action and market participants should be prepared. We could see a break of those lows, or a powerful short covering rally ahead of the Fed.
