2011-04-30

Gold rallied in the wake of the FOMC decision


After a relatively quiet period throughout most of yesterday, Gold rallied in the wake of the FOMC decision and the subsequent press conference given by Fed Chairman Bernanke. As we anticipated, there were no real surprises. The Fed Funds rate remained unchanged and the Fed stated its commitment to QEII, but made it clear that it does not intend to expand monetary stimulus. Bernanke also reiterated the Fed’s view that inflationary pressures from rising commodity prices are temporary, and do not warrant a change in the course of monetary accommodation.

He did however, caution that “if inflation persists or if inflation expectations begin to move” that the Fed “would have to respond”. Since the Fed’s announcement was as expected our view on gold remains the same. We still believe that upside towards year-end is a strong possibility, given that real interest rates remain low, government borrowing is high and global liquidity
though easing is still growing. However, from a fundamental perspective we feel gold could see a pull-back before its next move higher.

With no additional stimulus announced and given that the Fed’s view might have allayed some fears over rising inflation, it would appear that most precious metals support is coming from a weaker dollar. This places the complex in a vulnerable position ahead of this afternoon’s US GDP results for Q1:11. Should the figures prove substantially better than expectations, we could see some dollar strength put an end to the precious metals upside. Profit-taking ahead of month-end could also place some downward pressure later today.

Gold support is at $1,512 and $1,492. Resistance is at $1,541 and $1,550.

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