Wednesday, September 18, 2013

A touching story about gold on Fed watch day

These are quiet days on the currency markets as participants wait, supposedly with bated breath, for indications from the US monetary authorities about their plans for the future of Quantitative Easing (QE). The Fed will have its monetary policy statement and press conference late in the evening today (European time), or just after lunch in the USA.

In the meantime it might be instructive to compare two instruments that can be expected to respond to such commentary, whichever way it goes.

As has been pointed out here on many occasions, gold achieved strong and sustained growth in value during the period when QE was at its height. This was due to its perception as a hedge against possible damage that might be caused to the US dollar in a time of global economic uncertainty.

Because of the way it was carried out, QE also caused a rise in the price of US treasuries, which had the effect of lowering their yield. Major beneficiaries of this phenomenon were the currencies of emerging markets, such as India, which provided a superior return for cash invested there. Now all of these are in sharp reverse. US Treasury yields are rising steadily and the government of India and other emerging markets are having to take drastic measures to protect their currencies due to the extraction of cash back to the US dollar. The big global movers of funds see tapering as a done deal.

In Australia, albeit most definitely not an emerging economy, the Aussie dollar also suffered when tapering was first placed in the world headlines, but is now enjoying something of resurgence.

All of this points up the fundamental difference between gold and currencies. In Australia, the Central Bank, the RBA, has apparently halted its interest rate decreases. The country has a newly elected government with a substantial mandate and its largest trading partner for hard commodities, China, has published encouraging economic statistics in recent days and weeks.

Gold pays no interest. It is not under any political influence and it not traded as a commodity that has utility, other than as jewellery or as trace elements in some electronic components.

Technically, the dominant trend for gold is almost certainly down. However, it has bounced off an area of strong support on the monthly chart (see above) so a period of consolidation might be expected in the short term.

A very interesting feature of the same chart is the large bullish bar that occurred just prior to the levelling and then decline of the price. This is a classic “exhaustion” bar in Technical Analysis, and it tells a touching story. This is where investors, who had been either wary of the rise of gold or oblivious to it, finally heard about its rise due to the publicity the same rise received or decided that all those other buyers must know something that they did not. This caused them to pile into gold so as not to suffer the later pangs of a missed opportunity. The problem is that this most often happens at, or close to, the top of the market.

A Big Mistake, but one that occurs many times, over and over again, whether the instrument is gold, oil or an equity market glamour stock.


  1. Really very informative blog about gold...through this I get an opportunity to learn more about gold.. thanks..

  2. Agnnis, Many thanks for your kind comments / SMcK