Tapering will happen

  

What Mr. Bernanke says in Congress is obviously important but a study of the big picture brings the realisation that tapering, the term given to the winding down of bond purchases that is designed to pump liquidity into the U.S. economy, is definitely on the way. The Fed’s job now is to ensure that its introduction and execution are orderly with respect to the markets. And the fact of the matter is that the markets have been anything but orderly in the wake of previous announcements and leaked stories about tapering that happened around April and May last.

As we have mentioned before, the U.S. dollar price of gold is a particularly good barometer of the state of the greenback, and by extension the Forex market’s expectation for the ending of Quantitative Easing. The chart above shows the precipitate fall in Gold that started in April, (red block arrow on chart) which greatly accelerated what was already a downward trend.

Emerging markets, too, such as India, Mexico, and Brazil suffered significantly when their local currencies made a rapid devaluation due to the selling of local assets for US dollars in the expectation of the end of QE in the U.S.A. India, in particular, was badly hit. 

Chart courtesy of www.advfn.com

The government there has never been keen on speculative trading in the Rupee, as is common with Western currencies, but now there is a firm ban on any foreign exchange involving the Indian currency that is not for legitimate business purposes or travel.

With regard to gold, and as Mr. Bernanke now seems to be attempting to undo some of the selling exuberance that was unleashed at the start of the summer when expectations were raised in regard to tapering, there is every expectation that the gold chart at the top (XAUUSD, weekly) will make good use, from a Technical Analysis point of view, of the retrace area between where the price is now and the 200 period SMA on the weekly chart, which just happens to coincide rather well with an extension of the trend line down to the point when selling accelerated.

The dominant trend for gold against the U.S. dollar is still down. It is not part of our strategy to go against the trend.