Gold Struggles as Fed Prepares QE Exit- $1550 Critical Support
Fundamental Forecast for Gold: Neutral
Gold prices were softer at the close of trade this week with the precious metal off by 0.37% in New York on Friday to close at $1575. The losses come despite a near 2.5% rally early in the week that took bullion briefly above the $1600 threshold before pulling back sharply. Sequestration concerns, which had dominated the headlines this week on newswires and financial reports, had little impact on broader markets with investors taking it in stride as equity markets closed the week higher across the board. Gold remains in a precarious position here with prices continuing to test long-standing trendline support dating back to the July 2011 lows and while our broader bias remains weighted to the downside, we will hold off on establishing new positions until the March opening range plays out.
The Humphrey Hawkins testimony this week took center stage as Federal Reserve Chairman Ben Bernanke addressed congress on Tuesday and Wednesday. Bernanke defended the central bank’s policy stance arguing that the benefits of quantitative easing currently outweigh the costs. Still the chairman did sound an improved outlook for the region amid the resilience in private sector consumption along with the rebound in housing while noting that interest rates will rise over time as the economy gets on a more sustainable path. On the heels of the recent rhetoric being disseminated by FOMC members, we may see a growing number of Fed officials start to discuss a tentative exit strategy over the coming month Bernanke stating that the central bank has the ‘tools necessary to tighten monetary policy when the time comes to do so.’ As such, gold advances are likely to remain limited as inflation expectations remain ‘stable’ and expectations for cessation of QE start to gather pace.
Looking ahead to next week, investors will be closely eyeing the Fed’s Beige Book on Wednesday for an updated assessment of the Fed’s twelve districts. With housing, consumer confidence, and ISM manufacturing data all topping estimates this week, the report could further fuel positive sentiment in broader equity markets which have posted an impressive rally since the start of 2013 trade. Beyond the slew of interest rate decision from the RBA, ECB, BoE, BoC and BOJ on tap for next week, the highly anticipated February non-farm payrolls report will be paramount as we head into the close of the first full week of March trade. Consensus estimates are calling for a print of 160K, up from 157K a month earlier with the unemployment rate widely expected to hold at 7.9%. Again here it’s important to take note of changes in the labor pool as discouraged workers returning to the workforce may put upward pressure on the headline unemployment rate. With the data flow out of the US continuing to suggest that the recovery is accelerating, gold prices remain at risk with prices likely to range as we head into Friday’s crucial print.
From a technical standpoint, gold has remained within the confines of a well-defined descending channel formation with prices settling the week just above the key confluence of channel support and long-standing trendline support dating back to the July 2011 lows at $1571. Although the broader directional bias remains weighted to the downside, we will maintain a neutral bias in the near-term pending a rally back into key resistance at $1626 or a break below critical support in the range between $1550-$1555. A break below key support at $1550 puts us back on track with such a scenario eying subsequent targets at the May 2012 lows at $1527 and $1483. Interim resistance now stands with the 1.382% extension at $1585 with a breach above this mark eyeing subsequent ceilings at the 23.6% retracement from the October decline at $1611 and the key 61.8% retracement from the rally off the December 2011 lows at $1626. Only a weekly close above the 100% extension at $1631 would invalidate our broader bias. -MB