Gold Recovers Breaking the Cycle of Lower Pricing Over the Last Three Weeks

Looking at weekly charts, on Tuesday, September 28, it appeared that gold could close lower on the week marking the fourth consecutive week that gold traded to a lower high, a lower low, and a lower close when compared to the open on Monday.

However, the dramatic and strong upside move in gold futures yesterday of $34 changed the dynamics of the week. Today gold futures had only fractional gains, but even a fractional gain after the strong gains from Thursday changed a weekly candlestick from red (which is drawn if a stock or commodity closes below the opening price) to a green candle (which is drawn if a stock or commodity closes above the opening price).

The weekly range did contain a lower high and a lower low, but gold futures closed today above the open on Monday. The question becomes whether or not this week’s fractional gains can be labeled as a key reversal (a pivot from bearish to bullish market sentiment) or simply an upside bounce, followed by more selling pressure.

The rise in both the U.S. dollar and U.S. debt has for a large part been predicated on the belief that the Federal Reserve will begin to unwind (taper) their monthly asset purchases of $120 billion “soon”. Another factor on the radar of the investment community is the potential crisis that would result if Congress and Senate cannot pass legislation to raise the debt ceiling before October 18.

Yesterday both the House and Senate approved a stopgap measure to fund the government through December. Still, they did not come up with any legislation to address the current debt limit, which would cause the United States to be unable to make payments on its debt. Although there have been government shutdowns in the past, the United States has always made interest payments on the national debt.

Yesterday, the Secretary of the Treasury Janet Yellen and Fed Chairman Jerome Powell testified before the House Financial Services Committee. As we spoke about in our opening letter yesterday, during Secretary Yellen’s testimony, she made a dire prediction if the United States cannot meet its debt obligations. This will only occur if Washington is unable to pass legislation to raise the debt ceiling. According to the Treasury Secretary, the government would not be able to meet its financial obligations if, by October 18, no legislation is passed to raise the debt limit, which is currently restricted at $28.4 trillion.

The future direction of gold will be largely based upon the future monetary policy of the Federal Reserve. The Fed has invoked an extremely accommodative after the pandemic began in 2020, resulting in a deep recession worldwide. As the economic recovery in the United States strengthens, the Federal Reserve will begin to unwind the dramatic steps it took to temper the recession and aid in the economic recovery. At some point, most likely beginning next year, the Fed will begin to normalize interest rates which they took to a ¼%. The recent projection of interest rates released by the Federal Reserve in this month’s FOMC meetings “dot plot” suggested that this process of normalization taking interest rates from near zero to 3% would be implemented over the next three years. The Federal Reserve’s statement and Jerome Powell’s press conference also revealed that they would begin the process of tapering their asset purchases as early as November of this year. Analysts and investors still do not know the pace of the tapering process, although it is believed that they would taper their purchase of U.S. debt instruments and mortgage-backed securities with monthly reductions, which would take roughly a year until tapering resulted in no more asset purchases.

Lastly, the Bureau of Economic Analysis today released the PCE numbers for August. The report revealed that inflation continues to grow, with the August numbers showing that the PCE price index increased 0.4 percent, excluding food and energy.

The report made the following statements; Personal income increased $35.5 billion (0.2 percent) in August, according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $18.9 billion (0.1 percent) and personal consumption expenditures (PCE) increased $130.5 billion (0.8 percent). Real DPI decreased 0.3 percent in August, and Real PCE increased 0.4 percent, concluding that the PCE price index increased by 4.3% from one year ago.

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Wishing you, as always, good trading and good health,

Gary Wagner