As we predicted volatility in gold has become two-sided with prices recently becoming overbought from both a fundamental and technical perspective. While the take away from last week's Fed meeting fueled gold sharply higher, it appeared as if Fed dialogue yesterday took some air out of the bull case.
Seeing the gold market decline following comments from the Fed's Bullard that he didn't see current market conditions requiring a 50 basis point cut clearly suggests gold was "overdone" on the aggressiveness of upcoming rate reductions. In fact some analysts overnight are pulling out historical gold performance following what the trade is labeling the "first cut" in a cycle and have come away with mixed projections.
Apparently there have been five "first cut" events since 1989 and in two of those cases gold actually declined in the month following the move. However in the most recent "first cut" gold managed a 7% rally in the month following the reduction.
On the other hand Goldman Sachs has raised its 12 month price forecast for gold apparently off the idea that concerted rate cuts and equity market gains will result in what they call a positive wealth effect for gold.
A minor negative adding to the corrective tilt this morning is a story predicting a softening of Indian demand due to the sharp move in prices to six year highs.
In a shorter term context rumors that the US might delay some tariffs could be causing some safe haven selling this morning.
While the dollar index should find some temporary lift from the tempering of aggressive Fed expectations, US scheduled data this week has been very soft and that should provide headwinds for the Dollar and leave some macro-economic uncertainty in place.
In a longer-term supportive development yesterday, Russia indicated it may eliminate a value-added tax on gold investments next year and that could increase Russian demand for gold bullion, gold coins and gold stocks.
As we have indicated several times recently, traders should expect ongoing volatility with yesterday's action potentially setting up a normal retracement of the June rally which would allow for a setback down to $1,397.30 without technically reversing the uptrend.
On the other hand in the event that gold trades back above the Tuesday close early today that could result in a fresh wave of bargain-hunting buyers jumping into the fray.
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Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Financial Services LLC, unless otherwise expressly noted.
