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The big news last week was the decision by the Federal Open Market Committee to further reduce its bond buying program. The Fed will now buy $5 billion less of Treasuries and $5 billion less of mortgage-backed securities each month, bringing its total monthly purchases to $65 billion.
The unanimous decision surprised some investors, who thought that the extremely weak January employment report might force the Fed to think twice about tapering. But the FOMC seems determined to wean the markets off their funny money. Needless to say, the equity markets were not happy about the news.
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| Among commodities, gold is perhaps the most difficult to get a read on. |
The reduction in bond buying is also having a negative effect on the commodity markets. Soybeans, corn and wheat are getting pummeled. Copper and many other metals are sliding as well. Natural gas is one notable exception and is bucking the downward trend in a big way, clearing out practically every overhead buy stop on huge volume. Whenever you see that sort of move, you should stand up and take notice.
What About Gold?
Among commodities, perhaps the most difficult one to get a read on is gold. It has been caught in a tug-of-war, between downward pressure due to the pullback in Fed-driven liquidity, and upward pressure from safe-haven flows tied to the emerging market crisis. Essentially, it boils down to tension between investors who are treating gold as a commodity, and those treating it as a currency.
At the moment, the gold-as-commodity side holds the upper hand. As you can see in the chart above, gold is still in a downward-sloping channel, and has been unable to break upper resistance since October 2012. Recently, the precious metal formed a double bottom, but it has failed to clear chart resistance near $1,270 an ounce.
Incidentally, we’re seeing a similar story play out in the bond markets. The FOMC’s hawkish stance should have prompted a selloff in Treasuries, and sent interest rates higher. But concerns about Fed tapering are being outweighed by deflation fears, and long-term rates have actually moved lower.
What’s Next for Gold?
Gold’s immediate future will be determined by the emerging markets. If the outlook improves, gold is likely to move lower and remain within its downward-sloping channel. But if the situation worsens, gold should regain its allure as a safe-haven investment, and may finally break through resistance.
For now, traders seem willing to sell rallies into overhead resistance, and buy dips into downside support. Until that dynamic changes, your best bet may be to remain on the sidelines.
Good investing,
Douglas
{ 1 comment }
I do not think that the above channel map is drawn correctly. The bottom channel should pass thru the end point of wave 2 down and then the bottom of wave 4 down and then the upper channels should be parallel with that. When drawn correctly, I think you would see the current situation bouncing off of the upper channel.