Gold News

The Yellen Fed's Big Gold Rally

US central bank's weak tone on rates coincides with long-term bottom in gold...
THAT was some rally Thursday, writes Greg Canavan in The Daily Reckoning Australia.
Clearly a lot of punters expected a different outcome from the US Federal Reserve's two-day meeting on monetary policy. But what they got was more of the same. That is, interest rates will remain on hold until probably the next World Cup...and so in the meantime, please keep speculating.
This seemed to catch traders off guard – in Australia anyway – and a round of short-covering saw the Australian stock market shoot higher for the largest gain in seven months. The thing to watch for now is follow through buying. I suspect it will be tepid.
Not so in the gold market though. Having had a day to reflect on Fed boss Janet Yellen's comments, traders decided to dump the US Dollar and buy commodities. Gold surged, breaking through many layers of resistance. It's ended the week up about US$50 bucks an ounce from Wednesday night.
Last week, in a report to Sound Money. Sound Investments. subscribers, I wrote that there was mounting evidence the gold price was forming an important long-term bottom. We recommended a little known gold stock with huge potential to take advantage of this view.
So far, so good on that call. But we're under no illusions. It was just luck.
We could be about to get luckier though. Check out the chart below, which shows gold blasting through resistance. It's now back above its 50 and 200-day moving average. And it happened on strong volume, which is a good sign.
The Relative Strength Index, a momentum indicator, is about to move into overbought territory, so you should expect some sort of correction soon. But if gold can gain support above the moving averages, then the bottom of this long bear market may well be in.
Why is gold rallying though? In short, nervousness towards central bankers, and Janet Yellen in particular. Her comments Wednesday indicated that the US Federal Reserve wasn't too concerned about inflation.
Well, the market clearly didn't think much of that.
I've said for some time that gold isn't really an inflation play. It's an anti-central banker play and insurance against a fragile financial system. This could merely be a case of short-covering, or it could be the start of growing wariness towards Yellen's reign. Keep a close eye on gold to find out.

Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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