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Trading Gold by Timing the Fed

Gold's recent sell-off seems to be a continuing pattern of major price movements and directional changes after a significant policy event or any announcement by the Federal Reserve. Federal Reserve Chairman Ben Bernanke was in front of congress again this week and provided no material news or change in policy, but he did leave the door open to more easing if needed. This was enough to cause the sell-off in gold.

From the bottom of the 2008 crises to the middle of 2011, every time he spoke or made a policy announcement, the gold market reacted in a bullish manner. However the Ben speaks = bullish gold trade ended in the middle of 2011. In the summer of last year, speculation was high with regards to additional stimulus and printing, and in typical fashion gold reacted with higher prices. But since the $1920 high in September, gold has reacted negatively and severely sold off every time Ben spoke. Since then, the trade has become Ben speaks = short/sell gold. This trade defies logic, considering Ben surely did deliver on the printing front providing Operation Twist and swap lines to Europe.

Unfortunately, none of this money is stimulating the economy, though it is keeping it on life support.

Gold

Consider Wednesday's price action: there was a spike high based on expectation of QE and then almost a $40 drop from the early morning session after Ben spoke and shared no new information on whether he will provide QE or not. He's almost leaving it up to the Europeans to figure out their currency and debt mess. If things go wrong, he will be there with a bucket full of paper money to bailout Europe, but until then, the printing press has slowed down. We could see this type of choppy price action all summer long, back and forth, until Ben actually pulls the trigger with more stimulus, something President Obama has been recently suggesting. What caused the stimulus hope early this week was a speech by the President concerning how Americans could use three thousand dollars a year to buy thingamajigs.

Looking at the 24 hour chart for the spot price of gold, we can clearly see it trading between $1615 and touching as high as $1640. Then the hope for a stimulus announcement was killed by Ben, and within a very short period of time, gold broke support at $1615, to test the $1580 price right after his appearance. Today, it continues to trend downwards ever so slowly.

24_Hour Spot Gold

While looking for a major trend change in the gold market, we need to pay attention to important dates when the Federal Reserve meets and planed public announcements by Ben. Here are some other important FOMC meeting dates for the remainder of the year. Being aware of Ben's scheduled meetings and appearances in front of Congress can also help in trying to identify market turning points.

June 19-20*
July/August 31-1
September 12-13*
October 23-24
December 11-12*

Investing in this environment seems to work by trying to guess what force is dominant at the moment and how the fed will react with policy statements. The markets are moving between extremes of the Euro crash/market meltdown bet to the additional stimulus bet which seem to lift markets. This summer's trading action could continue to swing between these two extremes as we see gyrations in the gold price based on when Ben speaks. Since we have a sideways consolidation in gold developing for the summer, looking for days when Ben can move the markets might be a good strategy for lightening up on positions. While adding to positions on days when the market is extremely fearful around a Euro collapse. Eventually we will see a time (possibly later this summer) when the Fed is forced to stimulate, at which time we expect the Ben speaks = bullish gold trade will be back on.

Cheers,

 


If you are looking for ideas and strategies for protecting your wealth and trading opportunities in the precious metals sector, please visit our site and sign up for our regular updates and blog posts. You can also subscribe to recieve access to our TDV Golden Trader subscriber blog, trade alerts, watch list and more. We regularly provide technical analysis on the price of gold and the HUI index which can help you identify good entry and exit points for trading.

 

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