The gold market is trying to hold onto some gains following a hectic day yesterday. The markets do appear to remain nervous, however, stocks are in the green (for now anyway) and there seems to be calmer heads prevailing today.
Chinese markets remain closed today for a holiday. Property developer Evergrande remains the center of attention, however, and has an interest payment due on Thursday of over $83 million dollars. Although Evergrande is reportedly on the verge of default, some now believe that the Chinese Government is likely to step in to prevent a default. A bailout may only occur, however, if the government determines the widespread risk of default as being a risk to the nation’s economy.
Against the backdrop of Evergrande and increasing risk aversion, the Federal Reserve will begin its two day policy meeting today. The meeting will end tomorrow afternoon with the Fed’s announcement on policy and a press conference hosted by Chairman Jerome Powell. The sell-off seen yesterday is unlikely to cause any changes in the Fed’s plans, although it may have some influence on the decision. Powell will be forced to answer questions in the post announcement press conference, and markets may be particularly interested in the timing of any tapering the central bank may enact as well as its thoughts on inflation.
The Fed and its plans have been a major input for gold and will continue to act as such. The central bank now finds itself in an impossible position and it will be interesting to see how it attempts to normalize monetary policy after so many years of ultra-low rates and stimulus measures. The central bank seems to now find itself in a damned if it does damned it it doesn’t position.
The gold bulls will look to take prices back above previous resistance in the $1800 area. Without a breakout above this level on a closing basis, the bears will attempt to take prices lower, possibly even down towards the $1650 region. A significant push by the bears could, at this point, cause remaining bulls to throw in the towel and fuel a sharp price decline in the process. Despite some recent bearish forces, the gold market still has numerous bullish issues working in its favor. Inflation, stimulus measures and other issues may all be viewed as being bullish for gold and could keep the market from falling much further.
The bulls must, however, get something going to the upside or risk falling off. The lack of an upside breakout in recent months has frustrated the bulls, and any further lack of upside could be the market’s undoing. Resistance in the mid $1830s remains a major target. Without a breakout above this area, the bulls could find themselves fighting an avalanche of willing sellers on any significant rallies. While neither the bulls nor the bears are in form control on the daily chart, the market has turned from being bullish to being more range bound. This could mean that prices stay within this range for an extended period.