Thursday September 19, 2013 12:26 PM
(Kitco News) - Now that the Federal Reserve's quantitative-easing program is continuing unabated for now, analysts see potential for gold to retest $1,400 an ounce or even higher in the coming weeks.
Yet, some also offered caution about the upside since the Fed is still expected to taper its asset purchases in the coming months, even if it refused to do so on Wednesday.
The uncertainty about tapering will remain a key focus for the market. However, tapering may soon share center stage with yet another looming showdown between the White House and congressional Republicans over the budget and debt ceiling.
Gold prices soared more than $70 from Wednesday's low to the high after the Federal Open Market Committee surprised most market participants by saying it would keep buying Treasury and mortgage-backed securities to the tune of $85 billion a month. This is meant to push down long-term interest rates and has been dubbed as quantitative easing. Most economists had looked for the Fed to trim those purchases by somewhere between $5 billion to $15 billion.
Lower rates help gold several ways - increasing prospects for inflation, pressuring the U.S. dollar and lowering the so-called "opportunity cost" of gold, which is income lost by holding metal instead of a yield-bearing asset.
The Fed's action on Wednesday also sent stocks soaring, but pressured Treasury yields and the U.S. dollar.
Bjarne Schieldrop, head commodities analyst with SEB Commodity Research, figures gold has further to run to the upside and looks for a retest of $1,400.
"In general for markets, have we already priced in all news from the Federal Reserve decision yesterday or is there further to go?" he asked rhetorically. "I think…the decision's impact on the markets has further to go in general - in interest rates, FX and also commodities. So it should also mean further gold upside, I would think."
The FOMC news also boosted financial markets in emerging-market nations, Schieldrop added. And this, in turn, should be supportive for gold "since we know physical demand for gold in emerging markets is very strong."
George Gero, vice president and strategist with RBC Capital Markets Global Futures, also looks for further gains in gold but cautioned that there could be a correction lower first as some traders sell to exit positions and capture profits.
"It looks to me like the market wants to continue the upswing in gold, perhaps reaching $1,400 by year-end or earlier," Gero said. "I'm looking for more upside going forward, after profit-taking. We could have profit-taking Friday. Usually after a big up week, you have evening out (of positions) and profit-taking."
Mike McGlone, director of research in the U.S. for ETF Securities, described the Fed outcome as "a bit of a game-changer" for gold, creating the potential for more gains. It at least solidifies gold's low near $1,200 an ounce earlier this summer as a "much more durable, stable and significant" bottom, he said.
Much of the market's attention now may well shift to U.S. budget and deficit issues, said McGlone and Gero. The Treasury Department has warned that the country would run out of borrowing options next month and be at risk of default. The last standoff over the debt ceiling in 2011 led to Standard & Poor's to downgrade U.S. debt and provided an additional lift that sent gold to its nominal record high.
"We have to see how this debate pans out. Hopefully, it will not be a contentious issue….Markets don't like that type of thing," McGlone said. Nevertheless, this is an example of why investors often buy gold as a hedge against sovereign-debt worries.
Meanwhile, the gold market also will be keeping a close eye on monthly U.S. employment reports for clues on just when Fed tapering might occur, he said. Presumably, the job market would have to show further improvement before the Fed acts.
Gold potentially could aim for $1,500 resistance, just above the marginal cost of production and the 200-day moving average, he suggested. "The main thing that we really have to worry about knocking it off that trajectory is stronger-than-expected employment data," McGlone said.
He later added, "For them to actually taper in December, we're going to have to see confirmation from some very strong economic data, notably unemployment. And if we follow the trend from the last two months, it might be a long time before we actually see a taper."
U.S. non-farm payrolls rose 169,000 in August, below consensus forecasts. Additionally, the most recent report revised down the rise in July payrolls to 172,000 from 188,000, and for June to 104,000 from 162,000.
Frank Lesh, futures analyst with FuturePath Trading, said the Fed decision would seem to put a floor under the market around $1,300. Prices dipped below here Wednesday ahead of the Fed outcome for the first time since early August, but then rallied sharply.
Nevertheless, he looks for a trading band to develop, with $1,400 on the upside, possibly $1,450.
"The Fed surprised most of us yesterday," Lesh said. "But I think there is still going to be tapering talk. It looks to me like gold is going to want to go up and test $1,400. But I expect range trade."
The gold market will continue to monitor the dollar as well as the future of quantitative easing, he added. Part of this will be watching to see who will be the next Fed chief when Ben Bernanke's term expires early next year, and what the likely policies will be for the incoming chair, he added.
Adam Klopfenstein, market strategist with Archer Financial Services, looks for the post-Fed rally to be only temporary on ideas that policymakers simply delayed tapering.
"This short-term rally in response to the cheap money lasting a little longer than expected is probably going to be as short term as the cheap money itself," he said.
The delay in tapering from September to possibly December "shocked" the market, Klopfenstein said. "But it's something that's going to happen and is probably going to happen in the next three months," he said. "So I look at it like this - gold is probably a good sell on rallies."
Further, whenever the Fed does taper, the market "has already shown which way gold is going to go, which is lower," he added. Traders had pushed the metal down in the weeks leading up to this week's FOMC meeting on ideas that policymakers would have tapered.
Lesh described the gold market as one that in many ways has changed from the not-so-recent past, with short-term speculative traders in less of a hurry to rush into gold than during the metal's long bull run.
"We've got people buying gold for insurance, but you don't chase insurance prices," he said. "You buy enough that you are comfortable with and just hold it. On the futures side of things, we see people who will trade both sides of this market. On one day, you get buy signals. On another day, you get sell signals.
"That kind of situation just promotes trading in a range."
Read the latest news in gold and precious metals markets at Kitco News.
By Allen Sykora of Kitco News firstname.lastname@example.org
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.