Gold has risen $55 after the FOMC announcement, which is quite a bit for one day. Of course, when it crashed in April this year, even bigger moves were routinely seen to the downside. Wednesday’s move did manage to catapult it back above the critical $1,350 level. A week of FOMC angst was erased within a few hours.
Next comes a look at the daily chart of spot gold, which shows that in the process, the 50 day moving average has been regained as well. Volume was also quite chunky compared to what has been seen of late. Of course, in order to definitely confirm a medium term trend change, the resistance zone we penciled in on the chart still needs to be overcome. But every move has to start somewhere, and this was a pretty strong move. Usually such reversals back above a previously broken support level imply that market participants have thoroughly reassessed the near term prospects.
Note also on the 30 minute chart above that the move up from the lows of Wednesday morning seems to have been an impulse wave.
Gold spot, daily – back above the 50 dma. The red dotted lines show the important resistance zone that gold needs to overcome – click to enlarge.
Will this rally hold? We don’t know of course, but it does certainly look like another higher low has now been put in. Moreover, sentiment had become deeply bearish prior to this move. Between Friday and Wednesday prior to the FOMC decision, a great many bearish mainstream articles were published. Here are a few examples: “Gold’s worst days are coming” at CNN Money, “BNP Paribas Sees Gold Falling Even If Fed Doesn’t Taper” at Kitco (that one backfired right away), “Crude, gold in bearish trend; sell them” in a CNBC interview, “Gold Traders Most Bearish Since June as Syria Eases”, at Bloomberg – you get the drift.
It is fair to say that sentiment and expectations in the gold market are at the exact opposite side of the spectrum from those in the stock market. Apart from these sentiment considerations, there is a more important fundamental reason though why we are more enamored of gold than of stocks: the above discussed sentiment is the result of a widespread belief that things are ‘back to business as usual’ – that the economic downturn is definitely over, that all crises have been vanquished and that the economy will accelerate into a perfectly normal business expansion.
It is frankly astonishing to us that people seriously hold such beliefs in the face of the greatest monetary experiment of the entire post WW2 period. We have just seen the biggest growth spurt in the money supply of any 5 year period one cares to look at and debt in the world is 30% higher than on the eve of the Lehman collapse. In the US, in spite of banks not doing any net lending this year, total credit market debt is nevertheless hitting new record highs daily.
In our opinion those who have embarked on this monetary experiment haven’t even the foggiest idea what the longer term consequences will be (if they had, they probably wouldn’t be doing it). Note that Mr. Bernanke cited in his press conference on Wednesday that ‘financial conditions had tightened’ and that several players in the markets were forced to ‘unwind positions’. In short, a 3% yield on the 10-year note was already enough to kick over so many over-leveraged dominoes that the Fed was getting worried it may cause a chain reaction if it merely ‘tapered’ its asset purchases. And this is supposed to be business as usual? It sounds more like the Fed has painted itself into a corner it cannot get out of.
In our opinion anyone who sells his gold under such circumstances is tempting fate. And that is irrespective of whether Wednesday’s move up holds or whether some more downside eventuates in the near term. The idea that the economy can be ‘fixed’ by massive money printing is simply ludicrous in the extreme and the global monetary experiment with ‘QE’ is certain to eventually backfire badly.
The HUI has likewise regained its 50 dma, by rising a smart 22.47 points on the day. It was the biggest one day rally in a very long time. Similar to gold, it will have to overcome a fairly obvious resistance level though:
The HUI rallies back above the 50 dma, and we can now state that the test of the shallow uptrend line (the dotted blue line) was indeed successful – click to enlarge.
The HUI-gold ratio has finally also managed to make a higher low, something we noted previously we were hoping to see:
The HUI-gold ratio – it looks like the higher low we were hoping for is in the bag – click to enlarge.
Lastly, silver actually looks even better technically, as it has successfully tested its 50 dma from above and it has evidently held:
Silver spot, daily – a successful test of the rising 50-dma – click to enlarge.
As we always point out in these updates, a lot of volatility was to be expected, and it seems quite likely that that will continue for a while. Obviously more ground needs to be covered before a medium term uptrend can be said to be established for good. However, gold and gold stocks have now produced another higher low, something that simply didn’t happen during the preceding bearish phase. One should probably avoid getting carried away by a single strong up day though, and we will have to wait and see whether there is ‘follow-through’ buying in coming days. After all, both bears and bulls have lately been subjected to a number of head fakes, so one must reserve judgment to some degree.
However, we continue to believe that the long term gold bull market remains intact. Even those who are normally not investing in gold would do well to consider it as an insurance policy in light of the activities of monetary authorities around the world.
Courtesy: Pater Tenebrarum
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