Still Bullish on Gold

For Gold the “Bernanke Put” is in full effect, creating a solid floor under the metal. The recent FOMC meeting's message was clear; the Fed is committed to maintain an asset purchase program indefinitely (QE Unlimited) till labor market data improves. This continuous dovish bias, anchoring expected adjustments to the mid-2015 provides a backdrop that we believe is very gold supportive. It’s important to note that the rapid appreciation of gold occurred in the day after Jackson Hole and continued into the FOMC meeting. Given Gold's historical pattern, it’s likely that the rate of appreciation will slow considerably but the risk is still that of further gains. Interestingly, the “Bernanke Put” has increased Gold’s appeal to a wider audience and we are now seeing evidence of strong inflows into retail friendly ETFs. Of all the current drivers, gold maintains its strongest sensitivity to US developments, with the evolution of November's Presidential elections taking center stage. We expect market dialogue on the country's fiscal deficit to accelerate during this period, escalating further as we draw closer to year-end, and this would provide gold with further momentum for another move higher. After the election and “lame duck period” we suspect congress will once again raise the debt ceiling, but this increases the probability of a ratings agency action which would consequently damage the USD ( a similar scenario played out last summer). On the other hand, should the automatic across-the-board spending cuts become a reality and the Bush-era tax cuts not be renewed, worries over US growth would emerge and support gold. A core risk to our bullish upside expectations is Europe. While the ECB OMT and talk of EUR bonds, fiscal consolidation and banking union have lessened the tail-risk, there is still significant execution risk. Specifically, outstanding questions regarding Spain’s expected request for aid and Germany's questionable support of trouble peripheral nations. A negative EU surprise will have traders flooding back into the perceived safety of the USD. The aggressive rally in Gold and Silver gives the impression that the long precious metal trade is relatively crowded. Daily technical indicators indicate overbought conditions. We would wait for sell-off to relieve some of the stress before reloading on long positions.