FOMC Statement Emboldens Inflation Hawks
Thursday, January 26, 2012
The appeal of Gold futures as a hedge against inflation rose with the FOMC's confirmation that interest rates will be kept low over the next 2-3 years. The Fed's focus on growth versus inflation may be a bit misguided, as inflation data has been skewed by the financial crisis in Europe and lower raw material prices in China. Inflation may be an uncontrollable beast once it is let out of its cage. Technically, the April Gold chart shows a breakout above congestion at the 1680 level and prices have crossed into the psychologically important 1700's. However, prices seem to be nearing overbought levels, which could affect prices in the near-term. Some traders may perhaps wish to consider entering into a bull call spread, such as buying the April Gold 1750 calls and selling the April 1800 calls for a debit of 15.00, or $1,500. The trade risks the initial cost and has a maximum profit of $3,500 if the underlying April futures close above 1800 at expiration.
Fundamentals
Federal Reserve Chairman Ben Bernanke further fueled the recent Gold rally by forecasting that interest rates will remain low through 2014. The central bank noted that inflation risks are presently low, and that economic growth is a primary concern. This is good news for Gold bulls, many of whom understand that inflation is often difficult to control once it does rear its ugly head. The statement also did not rule out further large-scale Bond purchases, which may temper some of the bullish enthusiasm for Gold as a safe haven asset. If the Fed backtracks from this statement in the future, Gold's appeal to flight to quality investors could be further bolstered. Outside of the friendly FOMC statement, the debt-swap stalemate in Greece has fueled some new concerns that a soft landing may not happen after all.
Technical Notes
Turning to the April Gold chart, we see prices breaking out above the 1680 level at the upper end of recent consolidation. The next areas of resistance may be found near 1735 and 1800. Prices are now trading above the major moving averages, with prices closing just above the 100-day simple moving average yesterday. This can be seen as further technical validation of the recent uptrend and breakout. Tempering some of this recent bullish enthusiasm is the fact that the RSI indicator is nearing overbought levels, which may cool buying in the near-term.
Rob Kurzatkowski, Senior Commodity Analyst
