Now that the Fed has again spoken and laid out its plans for tapering of monthly security purchases, there is little left for investors to be uncertain of. Despite the Fed’s plans to begin cutting its monthly QE, the gold market is seeing solid buying interest that may in fact take it above key resistance, potentially sending it off to the races.
The bulls appear to have refocused their attention. The threat of tighter monetary policy is now riding a distant second behind the threat of sustained and problematic inflation. Although the bulls acknowledge the potential problems that inflation may impose, there seems to be very little risk aversion in the marketplace right now. Late Friday, the U.S. House of Representatives passed a slimmed down version of a spending plan. U.S. stock indexes hit record highs the same day and are thus far extending that rally into today’s session.
Key outside markets do not appear to be much of a factor today. The benchmark 10-year Treasury yield has declined in recent days, now fetching some 1.481%. The dollar, which hit its highest level for the year last week, is seeing some downside today while the price of crude oil is pushing higher today at over $82 per barrel. Economic data for today is light and may also not be much of an influence on the markets today.
The threat of a further rise in prices is not the only bullish factor for gold right now. The bulls can also buy based on dollar weakness, massive sovereign debt levels, a potential stock market reversal and other issues. Inflation may just be the next major bullish catalyst to fuel the rally if it is not transitory in nature as the Fed has called it. Even if it does prove to be temporary, inflation may still cause a significant rally in gold that could take prices well into fresh all-time high territory.
The gold bulls are in control on the daily chart and are finally attempting to extend the recent rally beyond resistance. The next key target for the bulls lies around $1836. An upside breach above this level on a closing basis could signal further upside and strong momentum for the rally. A failure at this level, on the other hand, could be indicative of a false rally and could give the bears new power to take prices lower again. Now that the market is well within striking distance of key resistance, the next several sessions could prove to be very key for gold’s near-term outlook. Not only could fresh buying enter the market, but a massive short squeeze could also take place and fuel a sharp and rapid rally in the yellow metal that could take it beyond resistance. If the bulls fail, however, it could set the market back for weeks or even months. The yellow metal has shown it is quite comfortable trading within a range and it could easily return to that range upon an upside failure.