Gold Futures have rallied for the last 4 weeks largely on hopes for further stimulus not only from the US Federal Reserve but also the European Central Bank and China. Gold Futures Markets remain focused today on the German constitutional court ruling on the validity of the ESM – European Stability Mechanism & the all important 2 day meeting of the FOMC – Federal Open Market Committee of the U.S. Federal Reserve starting today, winding up tomorrow, 13 Sep 2012. There were last-minute efforts on yesterday by some EU politicians to delay the court ruling, but those efforts quickly failed and the ruling will be announced today & markets expect the German court to uphold the ESM measures – a huge positive for the entire Commodity & Financial Markets.
Stable US Inflation condition and High Unemployment rate means perfect potential for monetary action. Last Friday’s atrociously dismal U.S. jobs report likely opened the door wider for a fresh U.S. Quantitative Easing announcement by the FOMC which will be bullish for the Equity and Commodity Markets, at least initially. Fresh US Quantitative Easing – The QE3 will probably take the form of outright purchases of U.S. Treasuries and perhaps mortgage-backed securities also to the extent ranging from $550 billion to $700 billion. FOMC is widely expected to also extend its low-rate guidance from late 2014 to the mid of 2015 at least.
Comex Gold Futures yet in uptrend, now have a support at $1702, which if breached, may slump to $1669 or $1651 levels. Gold Futures remain strong till above the crucial $1702 level & can surge to target upside levels of $1756, $1774 & $1810 also. The longer term Target of $1855 for Gold Futures remains within close reach on fresh US Monetary Easing. Silver Futures Prices remain Bullish till above the crucial $30.70 levels. On a sustained uptrend momentum, Silver Futures could easily target $34.30 & $36.10. The longer term target for Silver Futures of $44.20 & then $50.50 does not seem difficult if Silver Futures maintain sustained momentum & higher trading volumes above $35.20.
Gold Futures net longs have jumped around 40% in last 2 weeks. Gold Futures have till now maintained an upside momentum but the rise has not been astonishingly swift which was the case in the last few years, but are most likely to shoot up sharply higher if the FOMC – Federal Open Market Committee announces fresh Quantitative Easing on Thursday. But a market with already-heightened expectations for such an outcome would be vulnerable to a sell-off if the Fed does nothing. That is also a huge possibility as the Fed Chairman Bernanke would want to avoid any appearance that he might be trying to influence political elections in November. The US Dollar would probably soar in that event & Gold Futures could face a bout of profit taking, but for a couple of days only. The next move in Gold Futures would hinge on just what kind of language policy-setters use. Gold Futures may not see steep declines on bottom fishing by market participants who will still likely retain expectations of future easing, and therefore harbor a bullish Gold Futures outlook. US trade deficit widened in July by 0.2% to $42 billion. The bigger the deficit gets the higher, market interest in Gold rises. Demand for Gold from physically backed exchange-traded funds yet remains strong. Gold ETF holdings tracked by Bloomberg continue to march higher to a new record 79.748 million ounces, having expanded by around 2 million ounces in the past month. Gold ETF inflows since the beginning of the month are now at over 20 tons in total, and at 90 tons since the end of July.
Inducing Quantitative Easing will lead to US Dollar weakness which in turn makes Gold Futures bullish. Silver & Base Metals will also rally as trader’s hedge against the falling US Dollar. With the Federal funds target rate already effectively at zero, markets are watching to see whether the Federal Reserve undertakes a third round (QE3) of Treasury security purchases, intended to drive down long-term yields. The rally in Gold Futures Prices will be proportional to the size of the Quantitative Easing announced. The further rally in Gold Futures may also be limited to $1855, much below its all time high of $1925 seen last year, as Gold Futures seem to have largely already factored in more Quantitative Easing, But Silver Futures & other Base Metals may have a larger & a sharper medium term rally. Silver Futures are currently priced way below last years lofty high’s & have a long way to go. Silver Price Rally in the last 5 weeks has already outperformed the Gold Prices rally. Fundamentally, Shortage of supply in addition to a period of downside consolidation gives Silver a double advantage of a swifter & a larger price rise. Gold Futures are down only by a paltry 10% to the present $1730 level from its all time high if $1925 but on the other hand, Silver is yet down 32% to the present $33 levels from its high of $50 seen last year, providing a better opportunity of a faster upside recovery.
Gold Futures price rally may well be on its last lap. The Impact of Quantitative Easing on Gold Prices may not remain long lived as Physical Gold buying; one of the most important factors for sustainability of a long price rally is sorely missing. India, the world’s largest consumer of Gold is expected to see a 50% drop in Gold Demand due to Record high Gold prices on the back of a sharp decline of the INR / the US Dollar in the past 12 months. MCX Gold Futures have seen Gold Prices touch a Lifetime high of Rs. 32,077 per 10 grams for October Gold Futures on the exchange. Physical Gold has surged above Rs. 32,275 in the Indian Markets which has slacked the demand. Higher Gold Prices have largely induced re-cycling of Gold. The severe Austerity measures instilled in the European nations can also push people into selling physical Gold at higher prices for survival purposes, thus increasing the market inflow of physical Gold & creating a case of more supply than demand – A perfect scene for a major price slump. Official Buying by Central Banks & Gold ETF inflows though have been steadily increasing till now & may provide some flooring to the price decline when ever it may occur.
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