Update to Gold, Silver Price Action and the Central Banks
Gold and Silver prices are sharply lower this week after the US Federal Reserve announced on Wednesday that it will end its bond tapering program this month. This resulted in a much stronger Dollar and expectations that the Fed will begin raising interest rates sometime next year.
Gold broke through the important $1180 support level which no doubt has caused further technical selling. Silver also has been hit hard as prices on Friday dipped below $16. According to Jim Wyckoff, the next meaningful area of support for Gold comes in at $1150, and for Silver the next support area is at $15.50.
Markets no Longer Trade on Fundamentals
It is an understatement to say that these are challenging times for Gold and Silver investors, especially if you bought at higher prices. One thing to keep in mind is that markets no longer trade on fundamentals and value. The current investing environment is all about computer algorithms and investor reaction to Central Bank policies.
This disconnect will eventually reverse itself and markets will again trade on real value. The problem is no one really knows when this will occur. So it is still possible that Gold and Silver investors will have to endure lower prices over the short term.
This recent price drop in the metals has not altered our view on the future of both Gold and Silver one bit. The entire system is being propped up by printed money and central banks have been able to keep the scam going much longer than most people have expected.
It is Still all About the Central Banks
One of the most under reported stories is that the Federal Reserve, despite ending its bond buying program, has grown its balance sheet to 4 trillion Dollars over the last several years. No one is questioning how this will all be brought into balance?
In a recent Reuters article is was suggested that “recent events have increased the risk the U.S. central bank may need to keep propping up the economy for longer than had been expected just a few weeks ago”. (Source Reuters 10/29/14)
In a recent article in ZeroHedge, Alan Greenspan the former head of the Federal Reserve said that Gold is a good place to put money these days given its value as a currency outside of the policies conducted by government. (Source ZeroHedge 10/29/14)
The challenge for the ECB is even greater than that of the Fed. It is unlikely that the ECB’s assets purchases will be enough to jump start the EuroZone economy. Germany will ultimately have to acquiesce and allow the central bank to engage in a much larger QE package. There is no other option left in their tool bag.
So for the time being the central banks are still running the show which means that eventually some sort of currency crisis is inevitable.
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