Based on the August 31st, 2012 Premium Update. Visit our archives for more gold & silver analysis.
On this week's news roster we had a hurricane and the Republican National Convention (which scared some Democrats more than the hurricane), but all eyes are on a small town in the state of Wyoming, Jackson Hole, whose claim to fame is majestic Rocky Mountain scenery and the annual meeting of the Kansas City Federal Reserve. At the end of every August, central bankers and economists converge here to take in the views and discuss the latest economic issues. But mostly, along with everyone else on the planet, they wait to see what the Fed Chairman Ben Bernanke will say at 10 a.m. Eastern this morning.
It seems like there are too many people expecting too much from this speech. Gold investors are hoping that he will at least hint today that the Fed is ready to launch another round of bond purchases in order to lower long-term U.S. interest rates and stimulate more borrowing and spending. The Fed signaled last week it's ready to take further steps to spur the economic recovery, according to minutes released Aug. 22 of the central bank's most recent meeting, on July 31-Aug 1. There are still sweet memories of gold's price action when two years ago Bernanke's remarks at Jackson Hole triggered a stock-market rally and an upsurge in the price of gold. Bernanke hinted then that the Fed might begin a second round of quantitative easing and the Fed did indeed start buying bonds three months later. The central bank bought $2.3 trillion of debt from 2008 to 2011 in two rounds of what's become known as quantitative easing. And QE3 isn't the Fed's only option. It already plans to keep short-term interest rates near zero through late 2014 unless the economy improves. Also, the so-called "Operation Twist" is still in process. This is where the Fed sells short-term Treasuries and buys longer-term Treasuries. The program has been extended through the end of 2012.
Meanwhile to get a better idea of what is currently going on in the gold market, we now turn to the technical portion of today's essay that is dedicated entirely to the yellow metal (charts courtesy by http://stockcharts.com.).
In gold's short-term chart we see two major support-resistance levels are in play and gold has attempted to break above these levels both last week and this week.
The breakout above the major declining, medium-term resistance line has never been confirmed. Only one close was seen slightly above it (on Friday) and this immediately followed by a decline (on Monday). The price of gold is now visibly below this line and, for two days, gold has closed below the 300-day moving average as well. It seems likely that the breakout above the 300-day moving average is being invalidated as well.
The implications are quite bearish unless a strong move higher is seen to invalidate this view. This is not expected, however, based on the strength of the resistance lines and the bullish situation in the USD Index. In addition, RSI levels appear to confirm that a local top has emerged as well, similarly to what was seen in February.
Let's move on to the next chart that will allow us to have a look at gold from a non-USD perspective.
In the chart of gold from the Japanese yen perspective, the outlook is quite similar to what we saw from the USD perspective and the implications are bearish here as well. The RSI level moved to 70 and then declined which in the past has coincided with local tops, most recently in late February and also in August a year ago.
Summing up, the situation in gold has deteriorated this week as it has declined to two important resistance levels: the declining resistance line based on recent local tops and the 300-day moving average which has bearish implications. The long-term trend in gold is up, but the medium-term trend is down and declines are to be expected.
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Thank you for reading. Have a great and profitable week!