HardAssetsInvestor

Written by Sumit Roy  |

July 31, 2012

ECB & Fed Moves This Week Could Quickly Push Gold To $1700

Details

We offer our latest analysis on the precious metals market.

After weeks of indecisive trading action, gold finds itself in an opportune position. The yellow metal is hovering just below the top end of its two-month trading range between $1550 and $1630.

Of course, prices could fall back again as they have after the last three unsuccessful attempts at these levels. But this time around, there will be a pair of strong catalysts that will decide which way prices move.

GOLD

Up first is the Federal Reserve’s monetary policy decision on Wednesday. A CNBC survey of Wall Street professionals showed that 78 percent expect the Fed will eventually initiate another round of quantitative easing (QE3)—which would be bullish for gold.

However, most market participants don't see the central bank acting until its September meeting. Only 26 percent believe it will unveil QE3 on Wednesday.

Certainly, a surprise QE3 announcement will send gold prices spiking higher. But if we see the expected scenario of no action, gold traders will key off the Fed’s accompanying statement.

If the central bank clearly signals QE3 may be forthcoming in coming months, then that would be supportive. But a generic statement that is more ambiguous may be seen as bearish.

Regardless of what the Fed does, another catalyst for markets will reveal itself on Thursday. On that day, the European central bank will make its latest monetary policy decision.

CNBC’s survey showed that 89 percent of respondents see the ECB stepping into the market to buy sovereign debt to stem the crisis in the region.

Sources have indicated the central bank could also unveil other liquidity measures. As it relates to gold, the stronger the ECB’s action, the more bullish it is for the yellow metal. Traders will be particularly keen to see whether the central bank decides to expand its balance sheet, which would effectively be quantitative easing.

Thus far, the European central bank has been reluctant to join the Fed, the Bank of England and Bank of Japan in initiating a QE program of its own, but that could change as officials attempt to stem the sovereign-debt crisis that is quickly spiraling out of control.

If the two central bank decisions on Wednesday and Thursday are enough to finally spur gold to a breakout above $1641, we anticipate prices could quickly make their way to $1700 before testing $1800 later this year.

Otherwise, prices will likely fall back to support near $1550.

SILVER

PLATINUM

PALLADIUM