Gold trading steady under interesting circumstances

Gold started well in Europe then dropped once again at the New York open, in fact, succumbing to the old habit of trading down in advance of Federal Reserve Open Market Committee meetings. So it is that gold appears to be suffering from another one of its periodic bouts of price schizophrenia – this time reacting to Italy in European trading and Fed policy in New York trading. Gold is steady at $1298 while silver is flexing some muscle – up 19¢ at $16.89 and perhaps signaling the past few trading session what might be in store for gold.

There is an interesting development progressing quietly in the background that could have future implications for gold. In fact, it might be what caused the dollar to drop so abruptly the past few days. According to front page article in this morning’s Financial Times, top EU economic officials are signaling an end to the central bank’s quantitative easing program. The end to Europe’s bond buying program would at the very least put Europe and the United States on the same page as far as monetary policy goes (if not in the same paragraph or sentence). It is also likely strengthen the euro against the dollar. Japan which has stayed strangely quiet in the meantime on the global trade brouhaha, finds itself in the same position as the emerging countries in that it does not want to do anything to encourage capital flight. That translates to taking steps to keep the yen from dropping precipitously.

So we have this cross-Atlantic, cross-Pacific influence that helped drive up the dollar over the past few months, now moving in the direction of driving the dollar lower. Here is what it looks like on the dollar index chart (which by the way also shows a strong head and shoulders topping formation that traders might be eyeing). There is a reason I go to the trouble of laying out this scenario. It could evolve over the weeks and months ahead as a strong positive for the gold market. As I said above, it may be why we have seen a sudden reversal in the dollar.

Chart courtesy of TradingEconomics.com

Quote of the Day
“SGE’s [Shanghai Gold Exchange’s] transaction volume ranks among the top exchanges globally, buoyed by the tremendous capacity of China’s gold market, and is a reflection of China’s economic progress in the past 40 years. Accompanied by its economic growth, the country now has the world’s largest middle class – which is pushing the demand for gold and gold investment products. Chinese people have a culture of gold consumption and investment, so there is immense market potential as wages and GDP continue to grow, and living standards continue to rise.” – Wang Zhenying, President of the Shanghai Gold Exchange (SGE).

Chart of the Day

Chart courtesy of GoldChartsRUs.com

Chart note: Few know that seasonality can play a significant role in gold’s price behavior. As you can readily see in the chart above, the gold price often flattens, or increase sless, during the summer months. It doesn’t always work out that the price trends higher in the second half of the year, but it does enough of the time that veteran gold investors often time their purchases during the so-called “summer doldrums” when gold historically has changed hands at bargain prices. The fall and winter months by contrast bring with them a predisposition to higher prices that usually stretches into the early part of the following year.

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