You can see that the former support zone between approximately $1592 - $1588 or so, turned into a resistance zone and attracted selling yesterday when gold failed to extend past it and back to $1600.
Central Bank buying out of Asia has been attracted to the metal on approaches to this lower support zone in time past. We will have to wait and see if that buying materializes again.
One thing I find quite ironic. Let me mention it and see if you do also. The Bank of Japan, has adopted the policy of its new Prime Minister whose stated goal when he ran for election was to deliberately produce a 2% inflation rate. That was for the express purpose of getting the Japanese economy out of the deflationary trap which has snared it for decades now. When you really examine that policy, all it essentially consists of is massive buying of all maturity ranges of Japanese government debt, along with some targeted buying of certain ETF's and some other financial assets. The scope and the size of this buying has various estimates that I have seen but it looks to be in the neighborhood of (US) $1.4 Trillion or so.
What is the methodology to induce inflation when we cut to the chase? Simple - drive the currency lower pushing the costs of imported goods higher while making Japanese goods much more competitive on the global market. Also, keep interest rates artificially at such extremely low levels that it spurs borrowing and thus consumption.
What has been the result for gold priced in terms of the Yen? Answer - it shot up to an all time high just yesterday.
Now turn your attention to the US here. What is the policy of the Federal Reserve? Buy enough government bonds to keep interest rates, both short and long term, artificially low in order to spur borrowing and thus consumption.
Somehow this is supposed to produce inflation in Japan without it being inflationary here. Okay - what is the difference? Well, the US Dollar is going higher and higher against a large basket of other majors. This is shortcircuiting the inflationary implications of a weaker currency and has thus far enabled the Fed to play the exact same game that the Bank of Japan is playing but without the same consequences.
Regardless, Gold in US Dollar terms keeps being sold by hedge funds while gold in Japanese Yen terms keeps rising.
I can note this divergence and apparent contradiction but quite frankly what irritates me to no end is to hear various talking heads, pundits and analysts, praising the Fed for its efforts and avoiding inflation in the process. Why praise them? The only thing preventing their policy (the exact same policy as Japan's) from knocking the Dollar into the same abyss as the Yen is the fact that the some of the other major currencies have stunk to high heaven.
With the US stock market moving higher alongside of the Dollar, foreign investors are chasing US stocks hoping to catch the move up and profit additionally from the Dollar appreciating against their own domestic currency - a DOUBLE BAGGER as we say. That is generating strong inflows of foreign currency to our shores creating yet another source of artificial demand for the Dollar.
I am not sure what will cause the US Dollar to reverse course but the US is at 100% Debt to GDP ratio with a growing federal budget and a looming entitlements crisis. We continue to read reports of various trade deals between China and some of its trading partners that call for direct exchange in their native currencies and so forth obviating the need for any US Dollar involvement whatsoever. The US fiscal house is in such serious disorder that it is screaming a warning at the top of its lungs and yet utter complacency prevails.
These things have a habit of continuing on merrily until one day they just don't. I do not know when that will be but I know it will be. Instead of giving this problem the serious attention it deserves, our leaders are instead fixated on homosexual marriage and gun snatching. Nero at least produced something constructive while Rome burned even if it was only a song on his fiddle. This current crop of leaders.....
