The gold forecast for next week

The war for the soul of gold

Like most wars, the one for higher gold prices is ultimately a battle for hearts and minds. The conflicting sides each have a message. One says stimulate, the other says not to stimulate.  
 
This argument is going on in the United States in the Federal Reserve, and in a way it will be a theme of the US Presidential election. 
 
It is going on in Europe, with the Germans grudgingly giving ground to the anti-austerity forces, but no tactic yet having been embraced by both sides.
 
We know it is also going on in China, although somewhere in the recesses of the politburo basement, far from the light of day. One hunch here is that the Chinese economy was never as vaunted as we were led to believe and the slowdown there is much deeper than we know.
 
Where can gold bulls look, then? Perhaps to the bond market. Bond yields are often the canaries in the coalmine when it comes to inflation. Since bottoming out in late July at 1.4%, 10-year yields have climbed by 44 basis points in the last 18 trading sessions. 
 
Yields are still far off the highs of the first quarter of this year (2012), and inflation relatively faithfully moves in tandem with 10-year yields, with some lagging due to other market forces (shortages, pent up demand for certain commodities or basics, etc.)
 
Stimulus pushes yields higher; promise of stimulus does as well, but more feebly.
 
Some analysts are looking at declines in demand from India and China, noting accurately that the slow economies in those two populous countries is a barrier to more private buying/hoarding. True enough, but that in turn is reflective of low inflation, lower fear factors.

Regardless, sovereign buying this year has been more than enough of a counterbalance to the muted private market.

On a technical basis both gold and silver continue to be defined by consolidation and a narrowing trading range. Gold has absolutely found support right around USD 1600 per ounce. The significance of this is that our support level has consistently over time been rising to higher levels.

Characteristic even within its tight trading range is a succession of higher lows, as well as lower highs. There can be no doubt gold prices have had significant difficulty trading anywhere past 1621 per ounce. But, there is a good deal of technical compression, and a strong triangle forming. Fundamentals are equally strong and the very fact of US election may shatter many illusions in many markets over the next few months.

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