Don’t Fight the Fed

The gold price finished on a strong note at the end of last week, settling above an important technical support level at $1,700/oz. “Why an important support level?” You may well ask – or indeed, “what are these support and resistance levels that you refer to so often?” Support levels are as the name implies: points on the gold price chart where – based on a reading of recent market data – one can expect buying bids to increase, thus supporting the price.

“Resistance levels” are the opposite: points on the chart where a rising gold price can expect to meet selling pressure. Falls below support often presage a quickening price correction – or the very least, a continuing period of price consolidation – while closes above significant resistance levels are often a decent signal that the gold price is about to move sharply higher. In the words of the famous American trader Jesse Livermore: “prices, like everything else, move along the line of least resistance. They will do whatever comes easiest.”
As far as gold is concerned, round-numbers like $1,700 always form resistance on the way up and support on the way down. Thus, it’s important that we stay above this level if the upside momentum seen in gold since the start of the year is to continue.

The silver price continues to trade around its support level at $34, and remained basically flat over the course of last week. This indecision in the silver market is mirroring wider indecision across all markets at the moment. On the one hand, the conclusion of Greece’s debt swap deal can be construed as bullish news, but tied to this are concerns about the liabilities banks may face in the form of pay-outs on credit default swaps they have written on Greek debt – with the news over the weekend that an Austrian bank is facing difficulties as a result of such CDS obligations. Lets hope this echo of the 1931 Creditanstalt bankruptcy remains the only 1930s-nostalgia item on the menu.

This morning has brought news that Italian GDP contracted by 0.7% in the fourth quarter. At the same time, Reuters reports many think that it’s only a matter of time until Portugal and Spain start feeling the heat from the markets. But while euro woes continue to drag on sentiment, the US economy continues to improve. As Kiron Sarkar notes at TheBigPicture, commenting on last Friday’s better-than-expected nonfarm payroll numbers:

“Employment data for the last 6 months has shown the best improvement since 2006 – some 1.2mn jobs have been created and a total of 3.9mn privates sector jobs since employment bottomed out 2 years ago. Interestingly the 4 States hit the hardest by the housing crisis (California, Arizona, Florida and Nevada), created the most number of jobs.”

As the old saying goes: “don’t fight the Fed.” When central banks get serious about money printing, don’t be surprised if it results in an artificial boom.