Gold Prices are Headed Higher as More People become aware of the Dire Situation of the World’s Financial and Monetary System

Finally, the price of gold has broken out of its’ period of consolidation and now looks set to test the $1700 an ounce level in the short-term.  And, as both the technical and the fundamental outlook for gold remain positive, sentiment towards the yellow metal will also become more positive which in turn will provide additional momentum resulting in higher prices.

Last week the price of gold rallied above $1,660 an ounce for the first time since early May, after minutes from the latest U.S. Federal Reserve showed that many FOMC members believed that more monetary easing measures should be implemented as soon as possible unless upcoming economic data showed  signs of substantial and sustainable economic strengthening.

In the minutes the US Fed said. “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

Although the Fed minutes released last Wednesday failed to convince investors that the central bank is indeed ready to take further action a copy of letter from Bernanke to U.S. Rep. Darrell Issa (R., Calif.) seemed to ignite a small spark amoungst investors who now believe that the Fed is seriously considering further simulative action. In the letter, which was publicly released, Bernanke clearly stated that there is scope for the Fed to take further stimulus measures.

“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” Bernanke wrote to the committee’s chairman, Representative Darrell Issa, in a letter obtained by Reuters on Friday.

This sent the price of gold surging catching many traders off guard in particular the hedge funds that had recently increased their bets that the price of gold was going to fall. These shorts were forced to scramble out of some of their positions as the price of gold burst through some key resistance levels and above its 200 day Moving Average. But, in addition to a significant amount of short covering in the futures markets, there were also new longs that entered the market. So it seems that gold’s momentum to the upside will continue over the coming months. 

In the last two days the volumes in the gold sector have declined as investors and traders stay on the side-lines awaiting some sign that that the Fed will announce another round of quantitative easing at this week’s annual meeting of the Fed at Jackson Hole or at the Fed’s Sept. 12-13 meeting, when the central bank will release a new round of economic forecasts. While I doubt Bernanke will announce any new form of monetary stimulus at Jackson Hole, I think that the Fed will provide additional monetary accommodation within the next three months. And, as I have stated previously gold prices do not depend solely on the actions of the US Federal Reserve.  One other driving force behind the price of gold is the on-going debt crisis in the Eurozone.

Evidently, the ECB is considering setting pre-defined yield band targets under a new bond-buying programme but the central bank wants to keep it unknown to the public in order to avoid speculators trying to cash in. However, Draghi will have to wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund on Sept. 12 before unveiling full details of his plan.

It is also not clear how wide that band would be or how the central bank would decide when to intervene in the bond markets to bring down the borrowing costs. A further point under discussion is whether such a band would be tied to bond yields - their absolute interest rate levels – or bond spreads, the difference between a country’s debt compared to the benchmark German bonds.

In the meantime and while the ECB tries to find its lost bazooka, European countries are considering a form of bailout for Spain.  On Friday, a senior European Union source said. “The option which seems to have the best prospect of being taken forward is not that of a full (bailout) programme, but the drawing-up of a Memorandum of Understanding with a view to a limited programme of interventions on (bond) markets,” the source said.

“There are no formal negotiations because there is no formal request from Spain” for sovereign financial support, “but there are ideas under consideration,” he underlined.

The source suggested that Spanish Prime Minister Mariano Rajoy “appears to want to prepare public opinion” for just such a demand.

Investors increasingly believe that the country will be forced into making such a request with the government in Madrid struggling to borrow money on the international markets at rates considered sustainable.

Rajoy’s government is counting down to an October repayments crunch over short-term debt of 9.02 billion euros and long-term commitments worth 24.158 billion euros.

Spain’s economy is engulfed in the second recession in three years with unemployment at 24.6% — the highest in the industrialised world — and the banking sector in crisis

Greece was also a major focus last week as Greek Prime Minister, Antonis Samaras met with EU Juncker, and then German Chancellor Merkel and French President Hollande. French President Francois Hollande said Greek leaders must demonstrate their commitment to apply the reforms and that Europe must take decisions on the country as soon as possible following a progress report by Athens’ international lenders.

Hollande also said that Greece must stay in the Eurozone, echoing comments by German Chancellor Angela Merkel.

“It (Greece) must demonstrate again the credibility of its programme and the will of its leaders to go through with it to the end, whilst ensuring it’s bearable for the population,” Hollande told reporters.

“On the European side, we are waiting for the troika report,” he said. “Once we have this report, once the commitments … are confirmed, Europe has to do what it has to do.

“We’ve been facing this question for 2-1/2 years. There’s no time to lose — there are commitments to reaffirm on both sides, decisions to take, and the sooner the better. That means after the troika report at the European summit in October.”

While the price of gold may well run into some resistance at around the $1680 an ounce level we are going to see higher as more people around the world become aware of the real and dire circumstances regarding the world’s financial and monetary system.

Sadly, the majority of people will wait for the governments of the world to resolve these problems. And, as I have pointed out countless times this type of thinking will end up costing you dearly. They are not capable of “fixing” any problems. If anything they are the cause of most of our problems. Years of indoctrination and intimidation have beguiled people into trusting government to sort out problems. It is time to protect yourself and protect your hard earned wealth before the government takes it from you.

Buy gold bullion and silver bullion.

TECHNICAL ANALYSIS

Gold prices have broken above a key resistance level ($1625/oz), the 50 day MA and the 200 day MA. I believe that prices will soon test $1680/oz and then $1700/oz.