Forecast for Gold
Written by Ilya Spivak of
DailyFX
The onset of the global financial crisis, the credit crunch, and the subsequent move by many of the world’s leading central banks (most notably the U.S. Federal Reserve) to resort to effectively “printing” money through a policy of quantitative easing has produced a spectacular rally in the price of gold. Ever the standby store of value, the metal proved attractive first as a safe haven asset amid collapsing global capital markets and next as a hedge against what would surely be a period of runaway inflation. Timing monetary policy is notoriously difficult, so it seems only reasonable that the
consequence of record-low interest rates and churning printing presses would invariably flood the market with currency and send prices soaring.
While the logic behind the argument calling for a speedy return of “the great inflation” seems sound, its onset is far from a foregone conclusion. Because gold is priced in U.S. dollars, looking at the U.S. Federal Reserve seems most appropriate. The amount of money actually created by the liquidity injection engineered by Ben Bernanke and company is a function of the money multiplier, a ratio that measures what an initial deposit can expand into as it works through the system of fractional reserve banking through constant lending and borrowing. A crude estimate of what the multiplier ought to be, given the Fed’s reserve requirements of about 5.7% at present, yields a value of 1.75, suggesting that every dollar that the Fed injects into the banking system should produce $1.75 in actual money circulating in the economy. However, data compiled by the Federal Reserve Bank of St. Louis reveals that the current money multiplier is actually much lower than that. Indeed, it stands at the lowest level in over 25 years:
Going even further, a Fed measure of the velocity of money (the speed with which it changes hands) has fallen to its lowest level since 1987. While some of this can surely be attributed to the sluggish pace of economic activity, this does not tell the entire story. The unprecedented scale of last year’s credit crunch has created a major shift in behavior. As of the third quarter of 2009, personal savings amongst heretofore famously spendthrift U.S. households outstripped borrowing by the widest margin in five decades. Simply put, Americans have become keener to save than to borrow. It is small wonder then that the money injected into the system translates into a far smaller final amount than would otherwise be the case, and does so at a slower pace. In order for the fractional reserve system to multiply deposits, people must be willing to take out loans.
Returning to the question of gold and inflation, it would seem thatdespite the Fed’s “artificial” creation of liquidity, its actual impact on the supply of money and the pace of price growth may be limited at best because the standard mechanisms of monetary policy transmission are not operating as they are supposed to. With the unemployment level set to continue climbing well into next year, there is little reason to expect shell-shocked Americans to resume borrowing in earnest any time soon. This suggests that the fear of runaway inflation that has fueled the breakneck rise in gold has been more than a little overstated and hints that a meaningful correction is likely in the months ahead as disappointing CPI figures undermine the premise behind current bullish momentum.
GOLD – SIX-MONTH TECHNICAL FORECAST
While the overall structure has been grossly constructive with the market breaking to fresh all time highs by 1070, medium-term and longer-term studies are starting to look stretched and could potentially be warning of a major corrective pullback over the coming months. The weekly and monthly RSI confirms with a bearish divergence after the RSI has failed to post a fresh high both on the weekly and monthly chart, despite the higher move in price.
Look for a break back below 985 over the coming weeks to officially trigger the topping formation and expose deeper setbacks to retest key support at 845–865, which also loosely coincides with the 50% fib retracement off of the major 2008–2009 low-highs. From here, look for the market to enter a period of choppy consolidation in the 800–900’s before potentially considering a resumption of the longer-term bull trend. There is the risk that the market could still drop below 845–865, but ultimately any setbacks below 845–865 should be very well supported ahead of critical support by 680. Our recommendation is, therefore, to look to fade any rallies over the coming weeks, in favor of a decent sized corrective pullback to the 800’s into late 2009 and early 2010. The market should then look to find a base, and traders can once again look to buy back into the very strong, well defined and prominent bullish structure. Only a monthly close above 1100 would negate this outlook.
Here's where you can find the report on DailyFX:
http://www.dailyfx.com/files/DailyFX_Research_-_Forecast_for_Gold.pdf
