2011-04-27

Gold has long-term resistance at $1,540/oz.


Gold will witness an environment today that is nearly as positive as has recently been the case, but we favor taking on a more cautious tone today. The market will look for support from the potential that the Fed leaves monetary policy accommodative at tomorrow’s meeting, ongoing tensions in the Middle East, and to inflows of investment in order to keep the rally in motion. Gold has long-term resistance at $1,540/oz. Opposing pressure will be offered by signs that silver has entered a speculative frenzy due to wide price swings and from yesterday’s 9.2% hike in silver margins by the CME. We had been treating both gold as positive affairs in the last few
weeks, but would go neutral in the short-term until the markets settle down a bit.

The second focus of the market will be the Fed. An article in yesterday’s WSJ suggested that the Fed is discussing how to raise rates rather than when to raise them. The article was a change from Thursday’s suggestion in the paper that Fed Chairman Bernanke was intent on leaving ultra-low rate policy in place for now. Yesterday’s article showed that the Fed is apparently in discussions on either shrinking the balance sheet or paying interest on reserves held at the bank. It suggested that because there is so much liquidity held by banks, raising the Fed Funds rate may not have a normal effect. Because the Fed decision now appears to possibly go either way, we think it’s prudent to turn neutral on Gold in the short-term.

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