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Gold stages technical breakout to nearly 4-month high

Gold futures are staging a technical-chart breakout Thursday, moving above their highs for the summer and the 200-day moving average in a continuing response to dovishly construed minutes of the Federal Open Market Committee released late Wednesday.


“Technically, we’re seeing a breakout above the 200-day moving average and it’s prompted by more QE (quantitative-easing) talk and the fact that the structure of the dollar looks terrible right now,” said Charles Nedoss, senior market strategist with Kingsview Financial.


Around noon ET, gold for December delivery was $35.30, or 2.2 per cent, higher at $1,675.80 (U.S.) an ounce on the Comex division of the New York Mercantile Exchange. The metal peaked at $1,677.50, its strongest level since May 1.


September silver likewise has broken to the upside and topped the psychologically important $30-per-pounce level for the first time since early May. The contract was up $1.144, or 3.9 per cent, to $30.70 an ounce and peaked at $30.79, a level not seen since May 2.


“After yesterday’s FOMC minutes, it’s quite obvious that QE3 (third round of quantitative easing) is quite clear,” said Filip Petersson, commodity strategist with SEB Commodity Research. “There was a quite strong statement in the minutes. This is driving the gold market on liquidity expectations and also dollar weakness.”


The minutes of the July 31-Aug. 1 FOMC meeting said “many” members of the policy-setting committee feel further action would probably be needed “fairly soon” if there are not signs of a “substantial and sustainable” improvement in U.S. economic data. The minutes will add to the suspense and anticipation ahead of the Fed’s late-August annual symposium at Jackson Hole, Wyo., as well as the next FOMC meeting in mid-September.


Some analysts have cautioned that economic data released since the last Fed meeting, including a 163,000 rise in non-farm payrolls and 0.8 per cent increase in retail sales, show some improvement and therefore suggests more easing is not necessarily a sure thing yet. Nevertheless, commodities across the board are higher on growing expectations for more Fed action.


These expectations have helped the euro climb as high as $1.2590, its strongest level since July 4. A weaker dollar boosts gold since it leads to buying of the metal as sort of an alternative currency and also since a weaker greenback makes all commodities cheaper for holders of other currencies and thus can help demand. Further monetary easing also helps gold since it adds to worries about inflation whenever an economic recovery takes hold, plus it means a low so-called opportunity cost, or the loss of interest earnings that investors might have gotten instead by holding yield-bearing assets.


Zachary Oxman, managing director of TrendMax Futures, said there are market doubts about the apparent Fed view that inflation is not a worry at the moment. “I think people do believe inflation is present and are starting to price that in,” he said.


Nedoss said inflationary pressures already seem to be building, based on moves in commodities. Soybeans have $20-per-bushel within their sights; corn is trading “comfortably” above $8 a bushel and crude oil earlier traded back above $98 a barrel. “I think there is inflation out there,” he said.


Nedoss also pointed out that markets are expecting more stimulus around the world in sort of a “game of chicken where everybody is talking but we really haven’t seen any money.” European Central Bank officials have vowed to do what they can to defend the euro and there are expectations for further easing in China.


Gold’s upward technical momentum continues to build.


“This would be the bullish breakout that we’ve been looking for,” said Darin Newsom, DTN senior analyst. “The Dec contract has taken out the high side of its previous range and we’ve got support coming from a weaker dollar, which is very important when it comes to metals. So it does look we’ve turned the short-term trend up and we may be able to build on this.”


Gold had been in a sideways range that seemed to be narrowing as summer wore on, but now the December futures have broken above the early-summer high of $1,646.40 hit on June 6. Further, the metal has moved above the 200-day moving average of $1,658.10, Nedoss pointed out.


“That’s where we stutter-stepped yesterday,” Nedoss said. “It blew through it today.


We’re actually above the 300-day moving average at $1,669.90. I think the shorts have been run out of this market and now you’re starting to get breakout-trade-type buying with it being above the 200-day.”


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