Gold has been holding steady in the the $1,600-$1,800 band since early October. This could be attributed to consolidation after last summer’s historic run up to $1,895, but I think this wait-and-see attitude reflects current market sentiment toward the US dollar.
In fact, the first few days of April have seen a sharp dollar rally and decline in gold. This is rooted in deflated expectations of a third round of Quantitative Easing (QE3) after the most recent Fed Open Market Committee (FOMC) meeting. Once again, the markets are responding to the headlines while losing sight of the fundamentals.
This is especially peculiar because the Fed did not explicitly take QE3 off the table. In fact, according to the minutes, if the recovery falters or if inflation is too low, the Fed is already prepared to launch QE3. While there is not much chance of low inflation, I’ll explain below why the recovery is not only going to falter – it’s going to evaporate like the mirage that it is!
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