The announcement by the US Federal Reserve past Thursday of open-ended asset-buying shook the commodity and financial markets late Thursday and Friday. The impact of the news will likely reverberate into next week.
- Further reading: US Government unveiled open-ended steps to aid economy
Gold prices ended up on the week. The most-active December gold contract on the Comex division of the Nymex rose on Friday, settling at $1,772.70 an ounce, up 1.85% on the week. December silver fell on Friday, settling at $34.656 an ounce, but up 2.87% on the week.
The Fed’s decision to conduct an open-ended asset-buying program was no surprise for market participants. However, even those who foresaw a third round of quantitative easing did not expect the Fed to say that it would continue to buy assets until the labor market improved and the economy began to grow. Further it said it would continue with stimulus even if inflation began to exceed the Fed’s 2% target. The Fed also extended its forward guidance for ultra-low rates, or outlook for interest rate levels, until mid-2015.
The Fed is buying $40 billion a month of mortgage-backed securities and continuing with its Operation Twist program, so it will buy $85 billion in assets until the year end, at least.
Market analysts said two statements were key for precious metals: the open-ended nature of the statement, which is a change for the governmental policy, and the comments about the inflation target. That is particularly bullish for gold and many traders expect higher prices next week.
Gold is a the winner, as the opportunity cost of holding zero-yielding assets decreases with this over the longer term. At the same time, the risk of above-trend inflation grows due to the open nature of this plan….
This year’s gold price high of around $1,793, set in February, is likely the first target for bulls to storm the market. The next level is $1,802.7.
While the longer-term bullish trend for gold is intact, the yellow metal price is due for a correction. The market is sharply overbought and at the U.S. dollar index is oversold. The current uptrend could be interrupted.
In the coming week, gold traders could see some profit-taking due to the strength of the rally. A correction around the resistance area of $1,790.75-$1,802.93 could occur. Support is at $1,765.85 and $1,750.00.
Now, when the US Federal Reserve future policy is finally confirmed, gold’s upside pace may slow down. A consolidation is very much possible.