2011-04-26

The environment for Gold trade should remain favorable this week


The environment for Gold trade should remain favorable this week, with a fresh focus on the Fed likely to offer strong support. Gold prices should advance toward $1,540/oz over the next couple weeks, while silver could easily rise toward $50/oz. Support will come from accommodative monetary policy, tensions in the Middle East, a weaker dollar, and signs of investment inflows. First-notice in silver is on Friday and any potential squeezes could keep it buoyed. Thursday’s news regarding Scotia Mocatta’s registered silver inventories could do the same.

Moderate pressure will come from overbought conditions and strength in the stock market, but we think these will be fairly minor. We favor trading gold and silver as positive trading affairs, and maintaining our long position in July platinum from $1,740. We’ve been unable on our long gold recommendation for the last week.

The focus this week will be on the FOMC meeting on Tuesday and Wednesday, with a policy decision to be communicated on Wednesday. This will be the first Fed meeting with a press conference afterward, which could create additional volatility for markets as every statement is read into. The meeting has been expected to lay the groundwork for an exit from quantitative ease, as the next meeting comes only about one week before the June 30th finale of QE2. The issue to watch will be whether QE3 is signaled, or conversely how fast the Fed’s balance sheet
will be unwound. The WSJ reported on Thursday that Fed Chairman Bernanke appears intent on leaving ultra-low rate policy in place for now. That would suggest that there will not be a QE3, but that previous quantitative ease will not be unwound quickly. Such a condition should be supportive for Gold because it would signal that the Fed still has an uncertain view on the economy and is holding the potential for new rounds of QE close at hand.

Support will also come from ongoing tensions in the Middle East. The main opposition group in Bahrain warned the government that angry Shiite youths could “explode” if the Sunnite led government did not end its efforts to purge Shiites from state jobs. Violence is still prevalent in Libya, where the war between Gaddafi and rebels has been in a stalemate. Concerns for Gold center on safe-haven inflows as well as on oil price inflation sparked by shortages of Libya’s supply of light sweet crude oil. The loss of Libyan oil has increased competition between buyers
of other sweet grades from Algeria and Nigeria. Supplies in Nigeria aren’t certain because of renewed violence there in the wake of the Apr 16th elections.

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