Gold Forecast: Bearish Sentiment Remains In Spite Of Fed Bounce

Last week saw gold relieve some of its oversold conditions on a short term basis. Some participants interpreted the Fed’s continued dovishness whilst at the same time losing patience as a sign that gold should be bought. However, it was reasonable for gold to correct for a period as the Fed meeting was the catalyst. This unfortunately leads to a misinterpretation that everything has changed and the Fed’s tautology of last week is somehow different to all its previous evasiveness.

In our opinion Fed noise should be ignored, Fed bounces tend to be relatively short lived -- and the market momentum will not be changed by the exclusion of a word or two. Regular followers of our forecasts will know we have been forecasting this pattern for some time. Therefore,  we do not expect last week’s events to alter the long-term trend. The power of the Fed is far more limited than many realise.

It does look as though the bounce could be slightly larger than we expected…but all things considered it still seems unreasonable to expect gold to shine when so many things are against it. Inflation expectations are low and currently there seems relatively little chance of rates being raised anytime soon.

You would have thought with so many positive numbers coming in from low unemployment numbers to credit growth that the Fed would be in a rate rising mode. But it would seem that they are as trusting of the positive numbers as we are. It is our opinion that the US is more than likely in or entering a contraction and that the structural issues of excessive debt are now worse than in 2008.

Our gold forecast still points to lower lows coming in the next few weeks, whilst we are long term gold bulls we expect a final capitulation to occur before the next up leg begins. For sentiment to change it must be as a result of a substantial change of circumstance which is unlikely or a change in the attractiveness of gold relative to current bearish sentiment.

This means a lower gold price would entice those on the side lines to buy gold as it becomes a value play in relation to its long term fundamentals. A sharp drop to create extreme oversold conditions would create the energy needed for a substantial rise. Just as an archer draws his bow back to propel an arrow forwards so gold needs to reach an extreme condition.

Whilst we have enjoyed great success over the last few months with our forecasts, we also spend a great deal of effort looking for flaws and evidence that the underlying structure of the market is changing. However, so far we have found precious little evidence that this is the case.

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Courtesy of http://kenticehurst.com