Gold futures closed lower on Friday as investors continued to wait for clarity over the U.S. Federal Reserve’s tapering timeline.
Although most major investors are likely keeping their power dry ahead of the Fed’s September 21-22 policy meeting, we do know from the recent price action that they are aware of the importance of a pair of 50% levels at $1795.00 and $1800.00. These two prices are controlling the direction of the market.
On Friday, December Comex gold settled at $1792.10, down $7.90 or -0.44%.
The 50% level at $1795.00 represents half of the more than year-long range at $1460.30 to $2129.60. The 50% level at $1800.00 represents half of the short-term range at $1922.00 to $1677.90.
By continuing to straddle these two 50% levels or balance points, investors are telling us they are nearly neutral at this time ahead of the Fed’s tapering decision although the price action on Friday suggests they are leaning toward the bearish side.
Traders are leaning to the bearish side because monetary tightening is coming. Maybe not an interest rate hike but certainly a reduction of its massive amounts of stimulus.
The rallies we’ve seen in gold do not represent a long-term bullish outlook in my opinion. Most of the moves have been fueled by buy stops, position-adjusting and short-covering. Low volume is also one of the reasons for the lack of follow-through.
Shorts are covering at times because they believe the Fed will begin tapering, their timing has been off, however. So they are encouraged to adjust their bearish positions.
With the Fed planning on tapering, U.S. Treasury yields rising and the U.S. Dollar firm, it’s hard to build a bullish case for gold at this time.
Friday’s solid August Producer Price Index report, which exceeded expectations and hawkish from a Federal Reserve official were also behind the pressure on the dollar.
The benchmark U.S. 10-year Treasury yield rose on Friday after the PPI report indicated high inflation could persist for some time. While gold is considered a hedge against inflation, higher yields translate into higher opportunity cost for holding non-interest bearish bullion.
Gold investors will be closely monitoring the Fed’s decisions, since non-yielding bullion tends to gain when interest rates are low. But, Friday’s elevated U.S. PPI numbers seem to be driving gold investors to believe that the Fed could show slightly less accommodation down the road with tapering.
Gold prices could plunge over the near-term if the U.S. consumer inflation data exceeds expectations.
If you’re confused by the headlines then just watch the chart pattern. Look for a slight upside bias to form on a sustained move over $1800.00, and for the downside bias to continue on a sustained move under $1795.00.