Gold was trading on a downward trend yesterday morning, but spiked shortly after the minutes of the Federal Open Market Committee (FOMC). Prices leapt from $1305 to $1314 in the space of a couple of minutes as the Fed failed to confirm strong economic growth.
As a result of the economic data last week, there is some doubt as to when the Fed will increase interest rates. Last month, when there were positive signs of a strong recovery, Fed chairwoman Janet Yellen announced interest rates would go up in early January. This prompted a mass sell-off of gold reserves in favour for US bonds.
Economic data from March published last week showed the US economy was flat. The FOMC has not communicated to investors whether they intend to continue trimming their stimulus program or when interest rates will go up. Traders have subsequently returned to gold-backed exchange-traded funds.
Gold expected to rebound
Analysts now expect gold prices to continue on the upward trend in the next couple of weeks. The technical data looks positive for precious metals, and the sentiment is that if the yellow metal breaks the resistance point of $1320, it will have a psychological effect on traders to hold on to gold.
Mainstream newspapers are also citing tensions in the Ukraine and physical demand in China as the cause for gold’s sudden rise, but the charts show that prices were tumbling in early trading and only spiked at 1400 EST when the Fed minutes were released.
It would appear that investment banks are not overly concerned with the threat posed by Russian forces. Although politicos are murmuring suggestions of military action, it is mostly being ignored by traders who are more than used to political stage plays. Ukraine is being ear-marked as another ruse.
Second-guessing the US Fed
Conflicting data coming from central banks is do nothing to steady the markets either. The US Federal Reserve are being particular troublesome by announcing monetary policies one week, then saying, “Oh wait, hand on a minute, maybe we are being a bit quick to bite the bullet.” Market sentiment is suddenly turned on its head.
FOMC cite the non-progression of key indicators is a sign that the US economy – the largest in the world – is not as strong as predicted. The non-farm payroll, regarded as the measuring stick of the US economy was slightly lower than expected and that was the straw that convinced traders to covet safe-haven commodities.
But the fact of the matter remains that the US economy is growing and investment banks analysts are over forecasting. Labor force participation rate and employment-to-population ratio were both up and wholesale businesses continued to increase stockpiles on strong sales performance – all of which are good signs for future economic growth.
With external influences confusing the financial markets, it is difficult to determine which way gold prices will go in the short-term, but given there are positive signs of growth in the global economy, the value of precious metal will fall again.