Gold shines, but rally may be short-lived

The FOMC’s last meeting minutes has made it clear that the Federal Reserve is much less hawkish than was suggested by Janet Yellen at her inaugural press conference as the Fed chair last month. As there was no mention of the “six months” time frame between the end of QE and start of rate hikes, the markets have taken this as a sign that rates will stay at record low levels for longer than expected. As a result, gold has become relatively more attractive as a non-dividend-nor-interest-paying asset and the precious metal has risen along with stocks and risk assets in general. However, it is not unheard of that they are rising in tandem, although further gains for the yellow metal may well be limited if the equity market keeps pushing higher (in fact stocks have given back a good chunk of the gains made yesterday).

Nonetheless, for the first time since the end of March, outflows from gold-backed exchange traded funds have stopped – for now anyway. This is also a somewhat bullish development as ETF outflows were at least partially responsible for the recent slide in prices in the first place. However, unless the flows into ETFs turn positive (the world’s largest ETF, SPDR Gold Trust, is down 8 tons so far this year) and increase significantly, gold prices are unlikely to stage a meaningful and sustained rally. But with other precious metals such as platinum and palladium continuing to find support from ETF investors, albeit for different reasons, gold could follow suit.

Technical outlook

As a result of the rally, the yellow metal is all of a sudden finding itself above both the 50 and 200 day moving averages. The two average have meanwhile drifted in the “correct order” as far as a bull market is concerned after the relatively-fast-moving 50-day SMA crossed above the 200-day SMA a few weeks ago. Ironically this so-called “golden crossover” occurred at a time when the underlying gold prices were plunging. The two averages being in this order is a prerequisite for some types of hedge funds and other speculators who may be bullish and want to buy the underlying assets. With everything else being equal, the golden crossover itself is thus likely to attract those sorts of speculators who would otherwise have not looked at gold for buying opportunity or even those who were previously bearish on it.

Gold’s ability to rise further partly depends on what happens at around the $1320/2 area which is being tested at the time of this writing. This area was previously support and ties in with the 38.2% Fibonacci retracement level of the down move from the March peak. The 50-day moving average and old resistance level of $1315 could turn into support now. Silver meanwhile is also so far higher on the session having successfully defended the $19.60 support level yesterday. The grey metal faces potentially strong resistance at $20.60 which incidentally also corresponds with its 50-day moving average.