The Yellow metal has risen towards its highest level since February at $1,779.43 and the markets have assumed that the bullish movement is due to the recent Federal Reserve's QE. The so-called open-end program.
After the vigorous reaction in the first days, the market has tempered the movement. But what’s the real effect of quantitative easing on Gold price?
In a new issue of the Global Economic Engines, Nik Kalsi and Phil Carr, founders of The Gold and Silver Club and professional commodities traders, provide their analysis on the real effect of quantitative easing on gold price.
What’s the real effect of quantitative easing on Gold price?
How is gold performing currently?
After three months of summer doldrums with the price of gold remaining in a sideways range of $1520 – $1640 an ounce, gold finally broke out to the upside at the end of August in style! This breakout signaled the start of gold’s recent rally. In the last 4 weeks alone gold has made a gain of $190, moving from the lows of $1583 in August to today’s price $1771 an ounce, that’s an 11.87 per cent increase in the last 30 days.
Last week was an important milestone for gold. On Thursday 13 September 2012, US Federal Reserve Chairman Ben Bernanke ended weeks of speculation about the prospect of further monetary stimulus for the United States economy by launching a third round of quantitative easing (QE3). The market’s reaction was swift and overwhelmingly positive. Gold rocketed to a seven-month high of $1,775 an ounce within minutes of the announcement.
Fed moved with market expectations as it announced an open-ended purchase of $40 billion a month mortgage-backed securities, starting on Friday, to help the fragile U.S. labor market to recover as joblessness remained above 8 percent for 43 months.
“Since the eruption of the financial crisis in 2008 the Fed had spent $2.3 trillion up until 2011 in two rounds of non-standard measures; in response, gold nearly doubled its price during this period.
Unlike the previous occasions, Thursday’s decision wasn’t just another round of QE by the Fed. Rather it was the announcement that it is now official policy to print money without end. This has sparked greater interest in the yellow metal as a hedge against inflation. Gold is now heading for its fourth consecutive weekly advance, where the gain this week may exceed 3 per cent.”
Whilst we are still bullish on gold in the long-term, what’s our short-term outlook?
In the long-term we forecast gold will continue in a northward trend. However in the short-term we forecast gold may go through a period of consolidation or even experience a pullback in price before it shoots off again. The fundamental reasons why this could occur are:
European Debt Crisis: As the euro-zone recession deepens and spreads further into the core, there’s very little confidence that this situation will be turned anytime soon. Further weakening in the region and growing debt raises the yields of many EU countries’ bonds and also adversely affected the Euro. The risk factor attributed to investing in Europe seems to be negatively correlated with gold. This is potential due to the relation between Euro and gold as well as many struggling banks with liquidity problems traded their gold for cash to stay afloat. In any case if the EU debt crisis escalates further it may slow down or even pullback the momentum in gold price.
India: Is one of the world's biggest consumers of gold. So far this year gold imports to India declined by 26%, or by 200 to 250 tonnes according to the World Gold Council. In 2011 India had imported a record 969 tonnes of the yellow metal but higher import duties and a sliding rupee this year have created a decline in demand. If these factors persist they could affect the price of gold in the near term.
Key Technical levels to take into count?
As with any financial market the “trend is your friend”. This simply means you should trade with the trend of the market, embracing it to trade in the safer and more profitable direction.
Prices are more likely to continue in that same direction than reverse. Hence you have a better chance of making money because about 75% of the time the market will continue to go in the direction of the major trend, gold being a very good example. Buying is all about timing…
Over the last year, three significant pullbacks were in September 2011, December 2011 and May 2012 when gold dropped as low as $1530 per ounce, offering the ideal entry point. If we look back over the last 5 years gold has provided some outstanding returns for traders as the bull market continued in a strong uptrend.
As with any bull market though there have been some significant sell-offs along the way, for example in October 2008 the prices of gold plummeted by over 50% in 6 months due to the effects of the credit crunch. It then rebounded in spectacular fashion 1 year later to achieve all-time highs in 2010 and 2011. The primary driver for this was quantitative easing and deepening uncertainty in the Eurozone.
Now once again we are coming out of a 12 month gold correction, which has been help by the Feds QE3 monetary action. If gold continues to rally from the current price of $1770, the next key price action levels to look at will be, $1790 (which was the high reached earlier this year in February). Ahead of that the next key level will be $1826. A breakout from this level will see very little technical resistance until we hit an all-time high of $1920 as reached in August 2011. If the price continues to rally from there that’s when things get really exciting and we predict the $2000 an ounce level could be tested.
In the short-term if issues like the Eurozone or India have a negative effect on gold then we expect the price to decline. If we break downwards from $1770 on profit taking or bearish market sentiment then we will pay close attention to support being offered at $1730, $1690 and especially $1630, which previously was a strong level of resistance.
If the price is supported at these key levels then that presents a very lucrative buying opportunity with the expectation of higher prices as we approach the latter part of Autumn, which is typically a bullish period for precious metals.
On the back of the QE3 announcement we saw another aggressive rally with gold hitting a seven-month high. Although on a short-term basis, gold is looking rather attractive, we could potentially see near-term consolidation or a pullback, before gold continues to make further significant gains. In the long-term we are bullish on gold and believe it is entering into a new cyclical bull market, which is likely to continue deep into 2013. Our advice is to continuing buying on the dips
Nik Kalsi and Phil Carr are recognized as leading authorities on Gold & Silver trading and investing. They are the founders of thegoldandsilverclub.com and professional commodities traders.
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