Following last week’s tumble, the gold market looks back on track for its continued rise. A new report out this morning by Citigroup confirms major banking institutions are strengthening their outlook on gold. While the Federal Reserve Chairman, Ben Bernanke, neglected any mention of a third round of fiscal stimulus in the form of Quantitative Easing, he did reaffirm the Federal Reserve’s policy of low interest rates through 2014.
This is essentially carte blanche for the price of gold. Low interest rates discourage the growth of money through other avenues, such as savings. So long as interest rates are extremely low, storing money in dollars in a bank account does not make fiscal sense, as those dollars are not earning any money in interest. This is not fiscal advice to spend money rather than to save it, but an observation that the method in which you store and grow your money is partially determined by these larger macroeconomic trends.
The Federal Reserve cannot raise interest rates at this juncture without seriously impairing any recovery in the economy. Low interest rates free up credit and make lending available to individuals and institutions. With rates near zero and an economic recovery still unstable in the minds of most Americans, the Fed’s hand is pretty much forced into keeping rates low and announcing publicly that they will do so until the end of 2014.
The gold market reacted instantly to this news last month. Growth has been unimpeded until last Wednesday’s appearance by Bernanke before Congress. For the most part, the upward trend has resumed with buying on the dip taking precedence and overseas demand remaining strong completely regardless of the Fed Chairman’s statements.
The 3.5 percent drop in gold last week is the largest loss we have seen since December 18, 2011 during the December correction that brought gold down over 10 percent. We lack the signals that gold is as overbought right now, but of course there is always a possibility that gold could test further support levels and possibly correct again. Key support would be found at about the $1,650 line.
More likely, the technical damage from the drop that has already occurred will play itself out in the gold market and those who continue to buy on the dip, coupled with strong Asian demand, will provide firm support for the gold market to resume its bull market.
Senior Staff Writer – Certified Gold Exchange