Oct 30 a.m. (USAGOLD) -- Gold continues to test the upside in the wake of last Friday's reversal day. The initial target at $776.56 was satisfied and slightly exceeded in overseas trading, suggesting additional short-term upside potential.
In a widely expected move, the Fed cut interest rates by 50bp on Wednesday. Fed funds have been slashed by a full percent in just the past 3-weeks and now stand at a historic low of just 1%.
There is a sense that the Fed will be reluctant to lower interest rates further as there is simply not much to be gained by additional cuts, and much to be lost. Nonetheless, Fed funds futures are still fully pricing in rates 0.75% in Dec, with about a 24% chance of rates at 0.50%.
If the Fed does indeed opt to hold the line at 1%, they are likely to continue printing money and flood the market with liquidity in the hope of mitigating risks to growth. The Bank of Japan employed this tact in the early 2000s when their interest rates hovered near 0% and the Japanese economy continued to languish. It is referred to as quantitative easing.
Of course the system is already awash with money as a result of various bailouts and liquidity schemes. Continuing down this path of pumping liquidity debases the dollar and heightens the risk that the current financial crisis will morph into a full-fledged currency crisis.
"Some are beginning to extrapolate the medium- to long-term consequences of central-bank monetary creation," said Jeffrey Nichols, managing director at American Precious Metals Advisors in a MarketWatch article on Wednesday. "The flashing lights that they are seeing ahead are the lights of inflation and currency depreciation," which could push gold higher.
In my opinion gold should already be significantly higher based simply on the extraordinary demand, and dearth of supply, we are experiencing in the physical market. When you consider that substantial systemic risks persist, that the dollar is likely to resume its long-term downtrend, and that there is probably a monumental wave of inflation heading our way -- being able to buy gold below $800 is an incredible bargain. In a meeting yesterday, USAGOLD president Mike Kosares likened it to buying gold at $300 early in the decade.
Cracks are already beginning to show in the dollar's recent rally. The greenback has extended sharply lower in recent sessions after the dollar index formed a key reversal (outside day, lower close) on Tuesday. The DX probed below the 20-day moving average in overseas trading before rebounding into the range, but the near-term tone for the buck is looking increasingly vulnerable.
The EUR-USD rate also formed a key reversal on Tuesday and tested above its 20-day MA before slipping back into the range on increased talk of an ECB rate cut to offset the impact of yesterday's 50bp Fed cut. If we start seeing competitive rate cuts around the world -- Taiwan, Hong Kong and Kuwait all cut rates today -- it increases the likelihood that the US will resort to quantitative easing since we don't have much room for rate cuts anymore.
Global currency devaluations could keep the dollar from reestablishing its long-term downtrend for a period. However, devaluations would have a very favorable impact on gold. We're already seeing extremely strong global demand for the yellow metal. As currency debasement becomes more obvious that demand is likely to go up.
Supply is likely to remain an issue as long as the paper price of gold remains suppressed. Holders of physical gold are simply not inclined to sell at these levels. Prices obviously need to adjust when you have an overabundance of buyers and no sellers. A rebound above $900 would probably attract some sellers, but a price of $1200 to $1500 is probably needed to truly clear the market.
With the targeted$ 776.56 retracement level now exceeded, scope is seen for a short-term retest above $800, where the 20-day MA corresponds closely with the 50% retracement level of the decline from $930.10 (10-Oct high) to $681.65 (24-Oct low).
A convincing push above $800 would shift focus to $835.19/850.00 initially. This level is defined by 61.8% of the aforementioned decline, the former record high from 1980 and the low from early-May. A move back above $850 is the likely trigger for a return to the $900 zone.
Gold Market Movers:
US Q3 advance GDP -0.3%. Consumption plunged 3.1%, the first drop since 1991 and the worst reading since Q4 1981.
US initial jobless claims for the week ended 25-Oct unch at 479k.
Eurozone ESI confidence for Oct fell to a record low of 80.4.
German unemployment rate dips to 7.5%.
UK Nationwide home prices tumbled 14.6% y/y.
US economy shrinks in third quarter
Crisis saps European confidence
Gold production 'in crisis' -- Anglogold Ashanti CEO
