Gold Prices Surge after US Fed Chairman Testimony

Finally, gold prices smashed through the key resistance level of $1300 an ounce on Monday a few days after Federal Reserve Chairman Ben Bernanke assured investors that the central bank will not be pulling back on its quantitative easing too soon and only if there was a decisive improvement in the economy and labour market.

The price of the yellow metal jumped by more than 3% as a technical breakout above $1,300 an ounce triggered a rush by funds and speculators to cover their short positions. August gold closed up $40.20 an ounce at $1,333.00 an ounce and spot gold ended the day at $1,335.20 per ounce.

The rally in gold prices began on the London market and continued upwards for the rest of the day. The price of spot gold is now up by more than 13.1% from its post-Bernanke lows three weeks ago.  The yellow metal has now posted its biggest three-day rally in more than a year, on account of some heavy short-covering as futures traders rolled positions over to December from August deliveries ahead of first-notice day next week. In the last week, shorts have covered around 11% of their positions.

COMEX inventories continue to decline and JP Morgan saw its eligible gold inventories fall by a whopping 90,311 ounces as reported by Zero Hedge. This is a massive 66% withdrawal of the firm’s entire inventory of non-Registered gold. It leaves a token 46,000 ounces of gold which means that there is just a little over 1 ton of gold remaining in JP Morgan’s possession.

In his testimony before the House Financial Services Committee Fed Chairman Ben Bernanke said that the tapering of the quantitative easing stimulus measures would be dependent on economic data and do not have a pre-set schedule. He also indicated that the central bank could raise asset purchases if required to meet the inflation and employment mandates.

Regarding tapering of QE, Bernanke indicated that it would begin towards the end of this year but the actual timing would depend on prevailing economic data. According to Bernanke, “if the incoming data were to be broadly consistent with these projections, we anticipated that it would be appropriate to begin to moderate the monthly pace of purchases later this year. And, if the subsequent data continued to confirm this pattern of on-going economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear’. Yet, Bernanke emphasized that the Fed’s ‘asset purchases depend on economic and financial developments, they are by no means on a pre-set course’.

As one of the most powerful central bankers in history, and widely known as a leading scholar on the causes of the Great Depression, most would expect Bernanke to have a grasp on all things economic, including what drives the price of the world’s most precious metal. However, during the course of the hearings, Bernanke made some comments about gold and admitted that he has no clue about this market. ”Nobody really understands gold prices,” Bernanke told the Senate Banking Committee on Thursday. ”And I don’t pretend to understand them, either,” he said.

Offering a few suggestions, he noted investors may have sold it down recently because they are less concerned about the economic outlook.

“One reason gold prices are lower is people are less concerned about extreme outcomes, particularly negative outcomes, and therefore they feel less need for whatever protection gold affords,” he said. Bernanke also said many expectations about what gold provides for a portfolio are not supported by research.

“A lot of people hold gold as an inflation hedge but the movements of gold don’t predict inflation very well actually.”

Gold’s price has slumped to a multi-year low over the course of 2013, tumbling from $1,796 to as low as $1,180 recently, down around a third in value. But, in the last few weeks the price of gold has rebounded from recent lows and seems to be building solid support due to the strong demand for the physical metal.

During the week, the central banks of England, Japan and Australia released their minutes for their meeting in June. The BoE minutes revealed that the MPC voted unanimously by 9-0 to maintain the current asset purchase programme at GBP 375 billion.

The BOJ left the asset purchases program and the target rate unchanged in July, citing the country has shown signs of recovery. The minutes of the bank’s June 10-11 policy board meeting showed that the board members decided to continue the easy monetary policy aimed at ending a two-decade long deflation, even as some of its members voted against extending the duration of its low-interest rate lending program over fears it could be misinterpreted by the markets,

The minutes also showed that the central bank board members expressed confidence in the Japanese economy and about the aggressive monetary policies of the bank.

The BOJ has launched the world’s most expansionary monetary stimulus ever to beat deflation and stimulate the economy, pledging to inject about $1.4 trillion into the economy in roughly two years.

The minutes of the RBA July meeting affirmed that policy makers believe that the current level of monetary stimulus implemented over the past months should be appropriate in bolstering the economic recovery for the time being.

As widely expected the BoC left rates unchanged at 1.00%. The central bank downgraded the global growth forecast for several reasons which included the fiscal consolidation in US, weak economic activity in Eurozone and the slowdown in China and other emerging markets.

No matter the monetary policies of the major central banks, the fundamentals for gold continue to show on-going robust demand for physical gold from Asian countries, in particular China. Also, with inventories rapidly depleting in Comex and the LBMA, and with the current backwardation in prices, there is a risk of a significant short squeeze that will propel gold prices higher in the coming weeks.

And, if the US Fed Chairman has no idea about gold, perhaps he should ask his counterparts in Russia and China for some advice as it seems that they know a lot more about the value of this monetary metal.

TECHNICAL ANALYSIS

Now that gold prices have rebounded from the lows in July, and have broken above $1300/oz., the major next major resistance level is $1350/oz. Once this level has been breached, I believe we will see a gradual resumption of the bull market.