Wednesday, April 27, 2011

Gold Make New Record After Fed Stays The Course

The news the gold market was waiting for proved to be quite reassuring. The Federal Reserve Open Market Committee kept to the zero-interest-rate policy for an "extended period," and will not cut short the final stage of QE2. Also, proceeds from the Fed's mortgage-backed securities portfolio (the result of QE1) will be reinvested in Treasuries - making for a QE Lite. The decision was unanimous. In his later press conference, though, Chairman Bernanke did downplay any QE3 and he did raise the possibility of the Fed extinguishing the dollars it gets from its portfolio. The Fed raised its estimate of inflation for this year.

Although the start was a little slow, gold got energized by the announcement at 12:30 and the press conference at 2:30. After a morning spill, it spent most of the day climbing. A lackluster start gave way to a new record of $1,531.40 and a twenty-dollar gain. Helping push gold up was the greenback falling: it made a new thirty-month low this afternoon when it bottomed at 73.25.

Gold actually sagged at the start of regular trading today, moving from $1,510 to the high 1500s before recovering. A climb above $1,510 at 9:10 held for less than an hour before the metal slipped down to $1,505, where it hung around for another hour.

Its climb started slowly: when the Fed announcement was made at 12:30, the metal was still below $1,510. Evidently, there was still some uncertainty about Fed policy until dispelled at that time. Once the central bank confirmed that it would not follow the lead of the European Central Bank, gold jumped to $1,515 but then hung at the low 1510s until 1:15. Then, the first buying wave propelled the metal up to almost $1,525. Again, it sunk back; when the press conference started at 2:30, it didn't react that much. Not until 2:45 did a final two-stage buying boost come in that got the metal to its record at 4 PM. Gold then slid a few dollars, but the last hour of trading saw it shuffle along sideways. As of the close, the spot price was $1,527.30 for a gain of $20.20 on the day. The Kitco Gold Index split the gain into +$11.30 for predominant buying and +$8.90 for weakening of the greenback.

Gold's six-month chart, from, shows it shaking off yesterday's miniscule decline with today's leap:

With that jump into new uncharted territory, the metal is even more overbought. Its Relative Strength Index, found at the top of its chart, is well above the 70 overbought level: it's actually close to 80. There wasn't a buying panic today, but there was definitely a buying rush. How sustainable these levels are will have to wait for the post-Fed hangover, but the metal looks like it's left $1,500 behind.

The U.S. Dollar Index put pressure on gold by climbing from 73.75 to 73.95 in mid-morning. More oddly, it initially leapt upwards when the FOMC decision was released. That confidence in the Fed proved to be sorely misplaced. The abrupt reversal from 73.985 to 73.7 presaged a tumble that went on 'til the same time gold made its record. At the bottom, the Index made a new thirty-one month low of 73.25. Once it reached that point, it slowly climbed but without much power. As of 5:15, it was trundling up at 73.34.

Its own six-month chart, also from, shows its decline today pushing it to an outright oversold position:

Its Relative Strength Index, found at the top of its chart, is now below 30 - the level that marks the oversold border. It faced a mild wipeout today, starkly confirming its downtrend. Now that it's been inferred that the Fed has no problem with a declining greenback, the Index may slip a little further - but it is overdue for a bounce-up.

Once again, gold confounded the skeptics who got nervous when it first crossed $1,500. Closing in the high 1520s has certainly made those awaiting a pullback (like myself, I have to admit) look like fools. The metal's oversoldedness, though, does create a high-vulnerability zone for such a pullback. So far, it doesn't look like any pullback will kick in tonight. Asian traders were more uncertain about the Fed than North American traders. Their assuaged uncertainty may provide a small boost tonight, if they don't sell on the news. Needless to say, most North American traders didn't.

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