This week we learn whether the US Federal Reserve has made any further plans towards tapering their asset purchases. Currently, they remove $120bln of collateral out of the system and replace it with Reserve Assets. Also known as QE.
QE has been designed to crush the interest rates so that people like you and me can afford to take on more debt as the interest payments are low. This is designed to stimulate us all into getting the economy up and running. Some may say that the stock markets hitting all-time highs is proof that QE works, but the markets are not the economy. Currently, we are in the middle of transitory inflation which is making living more expensive for the average person. The stock market is being buoyed by margin trading and the banks have been slow to lend, which is what SME companies need to grow.
Tomorrow's announcement from Fed Chair Powell has been telegraphed as the point where he announces tapering. This should mean the market reacts with higher bond yields, and going by the recent relationship between the US10y and gold, the price of gold should come down.
The major risk of course is that the Fed can not taper or if they do, they do it so slowly the market adjustment is negligible. In this scenario, the disappointment of expectations should be enough to get the gold price rising and the yields going towards zero or maybe negative. At which point gold should be above $2k per oz.
The technicals show that the price of gold from the $2k peak has been in a descending channel and the probability is that this breaks to the upside eventually. That doesn't mean we don't trade lower within the channel. But ultimately I see this price action breaking higher. The near term trend could also be signalling a sharper rise as we are breaking out of that smaller channel in Green.
QE has been designed to crush the interest rates so that people like you and me can afford to take on more debt as the interest payments are low. This is designed to stimulate us all into getting the economy up and running. Some may say that the stock markets hitting all-time highs is proof that QE works, but the markets are not the economy. Currently, we are in the middle of transitory inflation which is making living more expensive for the average person. The stock market is being buoyed by margin trading and the banks have been slow to lend, which is what SME companies need to grow.
Tomorrow's announcement from Fed Chair Powell has been telegraphed as the point where he announces tapering. This should mean the market reacts with higher bond yields, and going by the recent relationship between the US10y and gold, the price of gold should come down.
The major risk of course is that the Fed can not taper or if they do, they do it so slowly the market adjustment is negligible. In this scenario, the disappointment of expectations should be enough to get the gold price rising and the yields going towards zero or maybe negative. At which point gold should be above $2k per oz.
The technicals show that the price of gold from the $2k peak has been in a descending channel and the probability is that this breaks to the upside eventually. That doesn't mean we don't trade lower within the channel. But ultimately I see this price action breaking higher. The near term trend could also be signalling a sharper rise as we are breaking out of that smaller channel in Green.
