Gold markets have been somewhat sideways during the month of August, but we did see a sudden selloff at the beginning of the month. This came as a couple of Federal Reserve governors suggested that tapering could happen between now and the end of the year. In that scenario, interest rates will rise, meaning that they offer a much more attractive real rate than before. This means that it is much cheaper to hold paper in the form a bond to get a return than it is to hold physical gold and pay all of those exorbitant storage fees. While most retail traders do not think about this, the reality is that a lot of big funds hold physical gold, not necessarily the paper equivalent.
That being said, I have a couple of possible scenarios for the month of September. Both of these are firmly anchored upon what the Federal Reserve will do in the form of tapering. After all, with the Jackson Hole Symposium and various Fed officials speaking, the market will continue to parse the idea of whether or not they will taper. The reality is that the Federal Reserve has been working with a lot of doublespeak as of late, with some members going off of the script, floating “trial balloons” into the media to see how the markets will react. It is very obvious that the market does not like the idea of tapering bond purchases anytime soon, which means that the Federal Reserve is painted into a corner.
If the Federal Reserve starts to taper bonds, you will see both the gold market and the stock markets suffer. This will be Wall Street throwing a tantrum as it has done multiple times over the last 13 years, as money starts to cost them in order to get involved in the markets. That being said, we are reaching a major inflection point as to whether or not the Federal Reserve actually will taper and risk crashing both the equity and gold markets, or if they will simply continue to “kick the can down the road”, fueling the “everything bubble” even further. Technical analysis suggests that we will continue to be a “buy on the dips” market unless we break down below the $1680 level. On the other hand, if we break above the $1835 level, this market should continue to go looking towards the $1910 level during the month.
