Some Degree of Volatility

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The gold market is seeing some degree of volatility as the new trading week gets underway. The yellow metal has seen a rapid reversal in mid-morning trade today. After being down several dollars per ounce, the market has now sprung higher with spot prices rising by some $7 per ounce.

 

The earlier downside in the market is likely due to a deteriorating chart situation. The short-term technical posture of the market has encouraged short-term futures traders to play the short side. As long as this remains the case, the market will remain vulnerable to selling fits that could drag prices down towards the $1700 level or lower. The bulls, on the other hand, will attempt to take the market firmly back above prior resistance at the $1800 level.

 

The yellow metal is quite likely in a holding pattern of sorts, however, until the latest non-farm payrolls data is released. Set for release on Friday, the jobs report could set the stage for an increasingly aggressive Federal Reserve to begin tapering its monthly asset purchases. If the Fed does begin to cut its monthly security purchases, it could have a bearish effect on the gold market. A rising dollar and higher bond yields could make life very difficult for the gold bulls if the period of easy money comes to an end. Although the central bank has suggested that it would taper until all of its purchases are over before touching interest rates, it has become increasingly likely in recent weeks that the Fed could look to hike rates as soon as next year.

 

Despite the threat of ongoing inflation, an increasingly hawkish Fed and other bearish factors, the gold market still has reason to shine. Fears over Chinese company Evergrande and its effect on the global economy may keep a safe haven bid in the marketplace. Higher energy prices could also weigh on the global economy and may also keep buyers alive and well in the gold market. The debt ceiling issue is another major potential roadblock for markets. If the ceiling is not raised, in time, the U.S. could default for the first time in history. A default by the country could send borrowing costs sharply higher and could even out the nation back into recession.

 

The bears are in control on the daily chart and will try to maintain that control for more than a few days. The market is in the midst of a downturn that began about a month ago. The bears have little to show for their efforts thus far, however, and could become increasingly frustrated if prices do not decline further in the days ahead. This could make the market also vulnerable to a short covering rally. Such a rally could be powerful in nature and could take prices rapidly higher, attracting fresh longs along the way.

At the end of the day, gold investors and traders may need to show patience as the market works out where it belongs. The Fed may not be trusted by the public at this point either, and it may take actual action from the central bank to have a significant and lasting impact on the gold market.

Gold Rocking As Shorts Covering

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The gold bulls are out today as shorts cover and bargain hunters step into the market. The price of gold is up by nearly $40 per ounce and has likely squeezed many of the futures shorts out of the market. Today’s rally could set the stage for further price gains in the sessions ahead as the month of October gets underway. October is typically a month that exhibits rising volatility and this year may be no different. As stocks get clobbered on the final trading day of September, one has to wonder whether the declines are presenting a great buying opportunity or are simply a sign of what may lie in store for the month ahead.

 

The gold market is seeing a price spike even as the dollar hit a yearly high overnight. With prices back above the $1750 level, it raises the question of whether the bulls may be able to mount an attack on previous resistance at the $1800 level. With several major issues on the horizon, it is certainly a possibility that the gold bulls see further buying activity as fears over a U.S. debt default increase or as the Fed continues its recent talk of tapering.

 

The primary reason for today’s gold rally is commentary from Fed Chief Jerome Powell. The Fed Chairman stated today that employment remains far from full. This statement by Powell has apparently been viewed as being slightly dovish and could lead to dollar weakness and some rethinking about when the Fed may actually begin to tighten interest rates (if it ever does).

 

Powell believes that inflation is transitory and will come down. If employment remains below the central bank’s desired levels and if inflation is under control, the Fed would have significant room to leave rates very low and keep its accommodative

stance in place. This could be highly bullish for gold and bearish for the dollar.

 

Powell was not the only official moving the markets today. Treasury Secretary Janet Yellen again sounded the alarm over the debt ceiling. Yellen suggested that a failure to raise the debt ceiling in time could be catastrophic, resulting in an economic recession as borrowing costs rise and stocks fall. With the U.S. credit rating impaired, borrowing costs would likely rise across the board, increasing the cost of everything from mortgages to auto loans to credit cards.

 

The debt ceiling must not only be raised, but it must be lifted prior to the last minute. If Congress waits until the very last minute again (as it did in 2011) it could send financial markets sharply and rapidly lower. The shaking of investor confidence would almost certainly lead to a massive exodus of financial assets that could even include gold. The yellow metal could, on the other hand, also see a rapid rise in buyers that could send it well above previous all-time highs into unchartered territory. With no upside chart resistance to contend with, the gold market could very well see its value rise to $3000 or even $5000 per ounce or more in a short period of time.