With FOMC Ahead - All Eyes Are on Gold

This article is written by Matthew Clark who is the owner of Global Forex Pros.

ABOUT THE AUTHOR: Matthew has been a trader for more than 20 years running FX Desks at major banks and retail brokers. He recently started Global Forex Pros as a service for brokers to offer their clients, teaching them to trade in real-time as professional traders learn at banks and institutions, giving the retail trader the confidence to trade and increasing volumes for the broker.

'A U.S. dollar is an IOU from the Federal Reserve Bank. It's a promissory note that doesn't actually promise anything. It's not backed by gold or silver.' P. J. O'Rourke. With all eyes focused on the dollar and this week's FOMC meeting, it is an opportunity arising in gold.

The recent surge in the dollar has been the go to story in the financial media, especially in the last few weeks. Readers may be surprised to read that although the impression that gold has been devastated, like the EURO, CAD and any number of other currencies, it is in fact down just 2.2 % as of Friday's close and is actually up 11% against the euro this year.

Given that in the long-term, gold has an inverse correlation with the dollar and stocks over the long-term, its performance has actually been quite good considering the rampant performance of the US markets recently.

With the FOMC taking centre stage this week, we are expecting them to end their forward guidance and drop the word ''PATIENCE'' from its statement. Although this does not guarantee the first rate hike will happen in June if the employment numbers continue as strong as the last 3 months, then any rate rise will be warranted.

Murmurs from US companies are starting that the strength of the dollar is impacting earnings. US stock markets are now more over valued than they were in 2008, with bubbles in auto loans, student loans, junk bonds and other areas of the bond market. If you add the fact that public and private debt in the United States alone is now $8 trillion more that 7 years ago during the last asset bubble, combined with the current competitive currency devaluations, the long-term prospects for gold as a protection and growth of wealth are increasing.

Friday was the first up day in XAU/USD in 9 days, even with optimism in gold low, this is a very rare occurrence for pair. The last time gold fell 8 days in a row was March 2009, and it has only ever fallen that many days in a row since the gold standard was abolished in the 1970's. In fact gold has only once fallen for 9 days in a row since the Reuters gold data began in 1968, August 1973.

If you believe that history repeats itself then it's maybe worth noting that in March 2009 after its last 8-day fall, the gold price went on an 8-month surge from $892 per ounce to over $1200 , rising almost 35%. If such a rally was to occur, it would take us to over $1550. Although we don't foresee such a rally, we do believe an attractive buying opportunity may soon arise.

If we look at the gold chart for this year, we can see that we are currently in the 5th wave making new lows for the year. As professional traders, we never try and pick tops and bottoms and trying to buy the low of a wave 5 can be a very messy and expensive exercise, as those who have tried to 'catch the falling ' of the EUR/USD this year have found out at their cost. However, we can see from the MACD that pressure to the downside is waning.

We continue with our short-term bearish view, with momentum indicators still strong to the downside, a test of the February 2010 lows at 1044 could be tested, although we would look for support around the lower end of the channel in the coming week. However, whilst we stay below the Fibonacci 0.382% retracement level at 1166.95, we will remain bearish, and a move back above the top of the triangle at 1175 would increase our confidence for a move back up into the previous wave 4 in the 1200-1220 range.

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