Gold and the lead up to FOMC

December 18, 2013

Last month was a good period if you were a gold trader, a steady bear market was clearly in control and gold trended downwards steadily. Technicals seemed to be in full control and fundamental traders were certainly running away from the precious metal. So where to know for gold? Especially since in the next few hours, FOMC will be released and it's likely it will have a major impact.

Source Blackwell Global Trader

Gold certainly has taken a beating when we look at the charts, and over the last month, it most certainly has been stuck in a downward trending market.

Source Blackwell Global Trader

The weekly chart certainly helps to reinforce this trend for the past year, showing the steep decline which has led to many investors moving out of gold, and into riskier asset classes.

So where have all the investors and traders gone? Well, gold has tumbled more than 27 percent for this year, and it looks likely there could be more losses ahead with a lot of major investment banks predicting lower prices – especially after QE kicks in. Additionally, hedge funds have moved out of buying gold and are more likely to be shorting it in the short term, as the worries about inflation have certainly subsided as US CPI data shows expected inflation at 1.6% for the year.  

The next moving point for gold though, has the potential to be a big move. When we look at the daily chart, it becomes clearly apparent that the volatility is starting to slow down and the Bollinger bands are starting to come together. This is a clear sign that markets are anticipating FOMC and are now waiting to make a big move either up or down on the result of the meeting.

What we expect from this meeting though, is a relatively dovish response from the FED. It’s likely the FED will not look to taper just yet or set an exact date as it watches economic indicators further as Yellen has already stated that she would like to see current unemployment figures improving. It’s very likely that come 2014, we will see more hawkish action from the FED as they look to get rid of QE slowly, and may even look to raise rates at the end of 2014 and start of 2015.

So what does this translate into for gold trading? Well, it’s likely that if it is dovish, which it most likely will be and markets are moving towards it, we will see a jump in gold prices. Current resistance levels are placed at 1252.00 and 1262.00, any higher push seems unlikely due to how gold seems to really stay in between Bollinger bands and generally pulls back after a breakout.

Although today is likely to be dovish and might lead to a jump, the long term still looks negative for gold, as the general trend line shows on the weekly chart. Long term, it's not so good for the precious metal. Further action from the FED in removing QE is inevitable and markets are itching to knock gold even lower on that news when it arrives. For now though, it's just a matter of time.

Written by Alex Gurr, Curreny Analyst with Blackwell Global.

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