FOCUS: Gold Gives Up Early Bernanke-Inspired Gains; Consolidation Continues

Wednesday July 17, 2013 2:32 PM

(Kitco News) - Gold futures had a volatile session Wednesday, first trading higher when prepared congressional testimony from Federal Reserve Chairman Ben Bernanke was construed dovishly, but falling when traders concluded he was not really saying much new after all.

Observers pointed out the Fed chief reiterated that the central bank anticipates scaling back on its bond-buying program yet this year, although he emphasized repeatedly this hinges on the economic picture.

The lack of anything more dovish from Bernanke, plus the metal's inability to poke through $1,300 an ounce, prompted some profit-taking, observers said. One veteran trader added that he suspects some producer hedging may have occurred around the $1,300 region.

"The fact that we did test that $1,300 level and it was sold aggressively is the story," said Kevin Grady, president of Phoenix Futures and Options on the Comex floor.

The bottom line is that gold remains in a consolidation trading range while the market continues to assess what to expect from Fed policymakers, observers said.

The August contract finished the pit session with a loss of $12.90 to settle at $1,277.50 an ounce on the Comex division of the New York Mercantile Exchange.

It traded as high as $1,299.70 in the U.S. morning, its strongest level since June 24. Traders at the time cited a soft report on sales of new homes in the U.S. and the release of prepared comments from Bernanke's testimony, in which the Fed chief said officials did not have any "preset course" on when policymakers might start to taper the bond-buying program meant to push down long-term interest rates, known as quantitative easing.

Still, Bernanke's overall commentary left the market with the realization that policymakers are looking to start exiting from quantitative easing when they think the time is right, traders said. So when all was said and done, gold finished the day not far from where it was just a minute before Bernanke's prepared remarks were released, which was $1,283.80.

"We've had a very good run (higher in gold), and Bernanke did not come out with anything new to stimulate new buying," said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures. "So we had some profit-taking. I don't think it will go too far. But the market was due for a pullback after having an $85 run (from the lows earlier this month).

"When he started talking, some people were already pulling the trigger. Short-term traders were moving out of the market," Gero said.

Charles Nedoss, senior market strategist with Kingsview Financial, said the pullback occurred when gold could not push through $1,300. This was a key technical level, he said.

Often, traders will exit positions to capture profits when they are unsure if the market can break through a major chart level. Further, major round numbers are often targets for traders to capture their profits.

"It feels like there is still some profit-taking around the $1,300 region," said Afshin Nabavi, head of trading with MKS (Switzerland) SA. ""A break above $1,305 should be very, very positive."

Grady said gold has approached $1,300 several times but could not get through. The market has been above $1,290 in four of the last five days. Some limited producer hedging might well be occurring around here, particularly from companies worried about obtaining financing for projects, he explained.

"They're not falling over themselves to hedge," he said. "But the bottom line is the financing is going to dry up if gold goes to $1,100.…So a lot of these people are being forced into hedging because of the danger of a lower price."

However, Grady also said, portions of Bernanke's testimony in which he alluded to the potential for tapering added to the selling.

"His comments about tapering coming, and it being just a matter of time, hurt the metals," said Sean Lusk, director commercial hedging division with Walsh Trading. "The level of transparency by the Fed has just confused people when you consider what they said at the FOMC meeting (and) what he said last week."

During a press conference after the June meeting of the Federal Open Market Committee, Bernanke laid out a tentative timeline in which tapering would begin yet this year and finish next year - provided that the economy continues improving. In the aftermath, however, several Fed speakers suggested the market may have construed the news more hawkishly than intended. Then, last week, gold surged when the Bernanke "highly accommodative policy is needed for the foreseeable future" and recent improvement in jobs data "if anything overstates" the health of the labor market.

"Right now we have to watch the dollar," Lusk said. The yellow metal frequently moves inversely to the greenback.

The dollar also oscillated during the day, and gold reacted accordingly, traders pointed out. The euro was at $1.3129 a minute ahead of Bernanke's initial testimony, climbed as high as $1.3177, backed off as far as $1.3096 and then recovered again.

The yield on 10-year Treasury notes also oscillated. They were at 2.500%, around the middle of the day's range of 2.461% to 2.554%.

"No surprises there (in Bernanke's testimony) so far and bonds like that he's emphasizing the 'taper' will be gradual when and if it begins," said Ken Morrison, founder and editor of online newsletter, Morrison on the Markets. He added that he looks for the next move in the dollar to be back to the upside.

Traders put support for August gold in the low $1,260s. Lusk cited weekly support at $1,263, while Nedoss listed the 10- and 20-day moving averages. Shortly after the pit close, the 10-day average for August gold lied at $1,260 and the 20-day at $1,263.40.

Read the latest news in gold and precious metals markets at Kitco News.

By Allen Sykora and Debbie Carlson of Kitco News; and

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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