FOMC Statement Punishes Gold, Boosts Stocks

The guardedly upbeat comments in the March FOMC report yesterday pushed equity markets to new multi-year highs. At the same time Gold bugs were disappointed by the lack of any mention of QE3. The statement starts with the following comments about the general economy:

Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further

As discussed in a previous post, recently Gold has been trading as the anti-dollar, mostly swayed by the

Gold Fails to Recover from Bernanke Shock

In the end of January, the price of Gold received a large boost when the Fed extended its prediction of zero short term rates until the end of 2014 (a year longer than previously announced). The market started pricing in another round of quantitative easing but those hopes were dashed with Bernanke's testimony before Congress last week. After a fast 5% drop, inevitably bids came in, but the bounce was short-lived. Given the strength of the US economy (relative to other developed countries) it looks like the need for Gold as a hedge against monetary collapse is becoming less pronounced. It is

Commodities Super Cycle Reversing Course

According to this Reuters article,

Last year had the lowest commodity inflows of the past nine years, with fresh investments dropping almost 78 percent compared with 2010, Barclays Capital said on Thursday.

Investors in precious metals and energy had a very volatile experience in 2011 and many are wondering if it really is the sure bet that they expected. For example Gold has had a big rollercoaster of a ride and Silver has been even more volatile (see a previous WhatIf post Gold Appears to have Lost its Shine for more details on the metals).

With Beijing trying to rebalance China's economy away from investment and towards consumption, the huge bursts of residential construction and capital investment may be behind us. As we have seen before, construction is unlikely to be picking up anytime soon and if China is headed for a slowdown, demand for most industrial commodities will drop considerably. Barclay's prediction of volumes and prices picking up notwithstanding, it appears that the market has reached a turning point in its 10-year cycle.

Gold Approaching Sell Target of 1650

In a WhatIf post from a week ago we were expecting a bounce in the Gold market with a sell target of around 1650. Spot bullion is now trading at 1635 with daily RSI in the 50's. We are approaching the target and Gold is no longer oversold so it would be appropriate to consider the timing of an entry. Recently the metal has been trading with a positive correlation to equities, and yesterday the S&P500 printed a new multi-month high, so we should wait for a change of sentiment in the equity market before establishing a short in Gold.

Technical Bounce in Gold To Present a Selling Opportunity

The metal has bounced from a low of 1522 reached in thin trading in the last few days of Dec. The precipitous drop from a Sep high of 1920 had taken it into oversold territory amid anecdotal evidence of large funds reducing positions into year-end. There will undoubtedly be fast money playing the bounce, but should it trade into the 1650 level this would present a good selling opportunity. The fundamentals for Gold continue to be quite negative, with the world's biggest consumer, India logging a 50%+ drop in imports in the third quarter of last year (see Reuters article). The US dollar was the first major currency to suffer from the effects of quantitative easing but will arguably also be the first to recover. Since Gold has been heavily used as a bet on the de-dollarization of the world economy, one of its main investment functions is also waning.