GOLD ANALYSIS

Update: Gold hit in double whammy from FOMC and Draghi

Gold's trading range appears to have narrowed after yet another non-committal statement from the FOMC but price hit again when Draghi statement also makes no definitive promises.

Author: Lawrence Williams
Posted: Thursday , 02 Aug 2012

LONDON (Mineweb) - 

One wonders whether some gold investors - and particularly gold traders - will ever learn.  Yet again gold moved upwards. Back to around the $1620s ahead of the FOMC meeting - and again gold has plunged back down below the $1600 mark, before making a small recovery back above that level, as the Fed took no definitive action yet again.  Whether it's a statement from Ben Bernanke or the Fed committee, the result seems to be exactly the same.  They will take action as necessary, but because it's not jam today the market falls back in a wave of disappointment.

As London broker Canaccord Genuity succinctly put it "The FOMC's tone was slightly more accommodative of further QE but stopped short of any extra measures. The committee will closely monitor incoming information on economic and financial developments and will provide accommodation as needed".

Whether gold price movement either way is justified is a moot point.  We are in the normally weak period for the gold price anyway as many New York traders and market movers are soaking up the sun and the heat, and the thunderstorms this year, in the Hamptons and gold market action is generally subdued.  The big test is unlikely to come until September and the next FOMC meeting then will perhaps be a better pointer as to whether or not more easing is on the cards. The consensus is that it will be forthcoming at some stage unless there's a remarkable turnaround in the U.S. economy and the labour market. 

But for the past couple of months the pattern has been almost identical.  For a week or so ahead of a scheduled Bernanke or FOMC announcement, gold climbs to around $1620 or a little higher.  When yet again no definitive statement on more QE is forthcoming gold falls back, consolidates and then slowly moves up again.  On the initial occasions when no definitive statement was forthcoming on QE3, the yellow metal fell back to the $1550s or even below, but more recently the successive drops have been less severe and the trading range has narrowed.  This latest non-announcement barely pulled gold down below the $1600 level - and then for only a short time.  Given that it is the northern summer doldrums season for gold, this could well be a strong sign of underlying strength - and if and when the breakout really comes it could be quite striking.

Silver in a way seems to be behaving slightly better than expected, although overall it is following a similar pattern to gold, but somehow its volatility vis-a-vis gold doesn't seem to be as great as it has been in the past.  This may well be because its big drop alongside gold on leap day was considerably greater in percentage terms meaning that much of the downwards volatility was seen then.  Should gold make a major upwards move in the next couple of months, which many anticipate, then silver could really take off as the very heavy short positions in the metal are unwound rapidly - or so silver investors hope.

Certainly long time silver bull Eric Sprott remains on key having raised another $200 million for his Sprott Silver Trust which will enable it to purchase around another 7 million ounces of physical silver.  Given so much silver trade is in paper metal, to take so much physical off the market could have a significant impact on the price.

Sprott seriously believes that the global economic situation is such that the whole system could collapse in a morass of debt with the public losing faith in the ongoing value of currencies as Central Banks print more and more money to try and keep the system afloat.  In his view this could lead to hyper inflation as people begin to lose faith in the value of money.  He told King World News in a recent interview "Sooner or later you have to write off the debt or you have to inflate it away.  If they inflate it away, then the reason for gold and silver to go higher will be incredible.  If they deflate it away, the need for people to take their money out of banks so the depositor doesn't lose money becomes all that more apparent.  And where do you put that money you take out of the bank?  Well, the logical thing is to have it in gold and silver."

The next milestone in the global economic imbroglio is today's European Central Bank meeting when the financial community is looking to see whether ECB President Mario Draghi can make good on his recent statement that  his institution would do "whatever it takes" to preserve the euro, and added: "Believe me, it will be enough."  But can it be?  The initial purpose appears to be to try and bail out the Spanish and Italian debt by purchasing those countries' bonds, but with France now seen as a third major nation heading in the same direction - Greece is probably past saving but is too small to have any real significance one way or the other - Germany, which would have to be the major contributor, may well decide enough is enough - if not now perhaps before the German federal elections due at the latest in September/October next year.

However should the ECB come up with agreements which would ease the Spanish and Italian debt problems then that is widely expected to lead to a strengthening of the Euro against the dollar and thus give a boost to the dollar prices for gold, silver and other commodities.  But conversely if no stimulus can be agreed than the reverse may happen and commodity prices and the Euro could take another knock - although gold in particular might see an inflow in European investment as a result which could mitigate any initial falls.

In the event Draghi might well have taken his cue from Ben Bernanke, and the gold market stuttered again back below $1600 as the ECB President didn't come up with anything definitive on any bailout for the beleaguered Spanish and Italian economies.  Interest rates were kept low and while there were implicit promises in Draghi's statement they appeared to be merely platitudes with a statement suggesting that the Central Bank should undertake "outright open market operations" and that the Eurozone governments would be standing ready to come up with rescue funds to buy government bonds.  This suggests that Germany is still holding firm on its contrary views. Without German support bailouts on the scale seemingly envisaged by Draghi's earlier statement are unlikely.  Obviously still much talking remains before any kind of satisfactory solution can be found.

While gold fell back to below $1590 on the ECB disappointment, it has again recovered to rise back over the $1600 level by the end of the week, but taking about a day to do so.  Even so gold ended lower on the week keeping to the recent pattern of up one week and down the next.  It looks set for another rise agin this week - when will the pattern be broken?