Gold Prices Soar Despite Bearish Reports From Most Major Banks

Gold prices surged last week smashing through several key resistance levels including the psychologically important $1300 an ounce level.

Gold prices continued to advance last Friday for an eighth session in a row, gaining almost 5% for the week, fuelled by a combination of increased physical demand, technical buying and economic jitters. And, on Monday, the price of spot gold hit $1329.70 per ounce, a 3-1/2 month high.

Market sentiment towards gold has been positive since the beginning of the year as weak U.S. economic data, and emerging market jitters have taken a toll on global equities, spurring demand for bullion - often seen at times of uncertainty as a safe haven.

Gold is up 10% this year after a 28% drop in 2013, while silver has gained more than 12%. 

The price of the yellow metal has broken well above its 50 day moving average, has traded above the 100 day moving average and has also closed above the 200 day moving average as well as the key resistance of $1,300/oz. These positive signs suggest that the upside could continue.

The price of gold began last week on a firmer note and then after vacillating for most of the day on Tuesday, prices rallied after Federal Reserve Chair Janet Yellen pledged to continue to maintain the monetary policies set by her predecessor Ben Bernanke.

In her first testimony before Congress, Yellen said. “His leadership helped make our economy and financial system stronger and ensured that the Federal Reserve is transparent and accountable.”

When speaking about the economic recovery, monetary policy and the financial systems Yellen expressed optimism about developments in recent months, but also made it clear work must be done to meet the Federal Open Market Committee’s objectives for the economy.

With regard to the poor employment figures released last month as well as the month before that, she acknowledged that recovery in the labour market was “far from complete.” Echoing Bernanke’s insistence that the FOMC is looking to a 6.5% unemployment rate as a threshold rather than a trigger, Yellen added.

“The unemployment rate is still well above levels that Federal Open Market Committee (FOMC) participants estimate is consistent with maximum sustainable employment. Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high. These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labour market.”

Looking to the upcoming FOMC meeting in March, Yellen, said she and other members will take time to assess these reports, as well as the February jobs numbers and other data when determining their next move on asset purchases. Only a “notable” change in outlook would cause the FOMC to pause the current course and only a “deterioration” in outlook would cause it to increase the amount purchased.

On the subject of policy, Yellen reaffirmed her support of current strategy.

“Accommodative financial conditions,” she said, “support consumer spending, business investment, and housing construction, adding impetus to the recovery.” Assuming labour markets and inflation continue improving at their present pace Yellen said the FOMC will likely continue cutting its purchases of agency mortgage-backed securities and longer-term Treasury securities by a combined $10 billion per month. Noting that purchases are not on a pre-determined course she added, “the Committee’s decisions about their pace will remain contingent on its outlook for the labour market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”

Meantime, last week, Bank of England, Governor, Mark Carney, pledged to keep interest rates at a record low in a recasting of forward guidance to combat persisting slack in the British economy.

“The first phase of guidance gave businesses confidence that bank rate would not be raised at least until jobs, incomes and spending were growing at sustainable rates,” Carney said. “As guidance evolves, that remains the case: the Monetary Policy Committee will not take risks with the recovery.”

In its report, the BOE said it expects fourth-quarter GDP growth will be revised up to 0.9% from the 0.7% estimated by the statistics office. It forecast a similar pace of expansion this quarter. For the full-year 2014, it raised its projection to 3.4% from 2.8% in November.

The pound rallied strongly against the US dollar after the bank released its forecasts. While the BOE offered an upbeat outlook, saying it expects the recovery to become “more entrenched and more broadly based,” it added that any rate increases are likely to be gradual.

 “The legacy of the financial crisis and the persistence of economic headwinds mean that interest rates may need to remain at lower levels for some time to come,” the BOE said. “Even when the economy has returned to normal levels of capacity and inflation is close to the target, the appropriate level of bank rate is likely to be materially below the 5% level set on average by the committee prior to the financial crisis.”

On inflation, the BOE lowered its projections throughout the forecast period, reflecting smaller-than-expected increases in utility prices and a stronger pound. Sterling has risen about 6.5% against the dollar in the past six months.

“The inflation environment is more benign than we had anticipated,” Carney told reporters, citing subdued global prices, falling commodity costs and a strengthening of the pound. “All of these developments will hold back imported inflation pressures that have to a great extent explained the above-target inflation over the past five years.”

The BOE sees inflation slowing to as low as 1.7% in the second quarter of 2015, based on market interest-rate expectations. It will gradually accelerate after that, reaching 1.9% in 2016 and staying around that level.

Once again, when it comes to gold, news from China portrays a very positive outlook for the yellow metal, unlike reports published in most of the Western media.

In an article published on Wednesday, February 05, in the Hong Kong Standard, the Chinese Gold and Silver Exchange stated that they expect the price of bullion to stable in the first half this year as the pace of tapering by the US Federal Reserve is still slow. 

"The price of gold would not move significantly as the pace of the Fed's scaling down of bond buying is slow and there are uncertainties in emerging markets' currency policies," said Haywood Cheung Tak-hay, president of the society.

Cheung expects gold to be traded between US$1,200 and US$1,400 per ounce, possibly going to $1600 an ounce.

The Society launched Renminbi Kilobar Gold in 2011, making it the first offshore yuan gold product in the world. Cheung said he expected daily turnover to reach HK$30 billion to HK$40 billion, but it recorded only HK$8 billion to HK$9 billion, which was disappointing.

The society has paid close attention to the development of the Shenzhen Qianhai area. It is in talks with mainland authorities to set up a warehouse for gold and silver and it is expected to be built in two years.

"There are 3,000 to 4,000 gold and jewellery manufacturers in Shenzhen now, so it is necessary to build a warehouse," said Cheung. “I also hope to bring the bullion trading platform to Qianhai."

He also recommended that the Shanghai Free Trade Zone should cooperate with Hong Kong and Shenzhen Qianhai, enabling daily gold trading volume to reach hundreds of billions of yuan.

Despite calls for lower prices from practically every major bank, the price of the yellow metal is now up by around 10% from the beginning of the year. Gold has now broken above the $1300 for the first time since November last year. This is an important turning point for the yellow metal, and I urge you to consider adding to your portfolio.

If you have been waiting to buy your first physical gold, now is a good time to start, as I believe the bull market is making a comeback. If you already own gold, but have been waiting for the right time to add to your position, now is the time.

Do not wait any longer. Add physical gold to your investment portfolios.

TECHNICAL ANALYSIS

The upward momentum in the price of gold continues as prices break above $1300/oz., as well as the 200 day MA. Prices look set to test $1350 in the short-term.