Published On: Sun, Jan 20th, 2013

Bernanke Comments Steady Stocks and Gold

The global stock markets experienced a degree of turbulence on Tuesday by oscillating between gains and losses to eventually trade almost flat. They were buffeted by the positive news disclosing improvements in Middle East tension and by the negativity arising from Bernanke’s dire warnings about the <a href=””>fiscal cliff crisis</a>. The following table displays the final positions of US major indices on Tuesday.

Investor confidence was boosted on Tuesday after Hamas ministers advised that a cease-fire would come into force at mid-night although these reports were not confirmed by Israel. However, the Chairman of the US Federal Reserve, Ben Bernanke, poured cold water over any new fresh optimism by warning that the Fed was not equipped to counter a potential double-dip recession if the US Congress failed to reach an agreement capable of properly addressing the $600 billion ‘fiscal cliff’ crunch.

Bernanke went on to state that the US economy recovery was further challenged by other serious obstacles such as a deep credit squeeze and significant weaknesses in the mortgage market and housing sector. Prominent market analysts summarized yesterday’s developments by stating that investors were spooked by the intensity of Bernanke’s fears concerning whether US politicians will act in time in order to deliver a deal before the ‘fiscal cliff’ deadline elapses.

Riskier assets, such as stocks and the Euro, were bolstered slightly on Tuesday amid increasing hopes that the current meeting of the Eurozone financial minsters will finally approved additional aid to the heavily indebted Greece. This news partially offset the market slump that was experienced following Moody’s reducing the French credit rating on Monday. As this dramatic outcome had already been priced-in by investors, it had limited impact on stocks.

The price of crude oil has appreciated in value over the last week amid the rising levels of the conflict in the Middle East threatening global supplies; the deteriorating Eurozone debt crisis and the U.S fiscal cliff crisis.  The announcement of a possible truce today partially reversed this trend. A sharp surge in oil prices had been recorded on Monday resulting from fears that the fighting in the Middle East would spread outside its present locality. The following chart illustrates the trading performance of oil over the last few trading days.

Following its largest daily gain on Monday in over two weeks, the price of gold steadied at $1,726 per oz yesterday, as displayed on the following 5 day chart.On Monday, gold was boosted in its capacity as a safe-haven asset by the increasing tensions in the Middle East and a possible resolution of the US fiscal cliff drama. Investors helped bolster the precious metal on fresh optimism that the USA could avoid a new recession on increasing hopes that the US Congress should devise a solution in time to avoid the automatic triggering of $600 billion in spending cuts and tax hikes scheduled for January 2013. However, Bernanke comments and a possible Middle East cease fire caused gold to weaken on Tuesday.

The value of bullion was also underpinned by nervous developments in the Eurozone. The Greek government sanctioned new laws on Monday to ensure that its debt repayment targets would be achieved in order to appease its bailout fund lenders ahead of an extraordinary meeting of the Eurozone financial ministers commencing today. Athens is desperately attempting to convince these officials to release the urgently needed next tranche of bailout funds in order to stave off pending national bankruptcy.

At present, the Greek government does not possess significant funds to service its next repayment schedules. In times of increasing uncertainty, such developments always provide solid support for gold. However, the recent downgrade of the French credit rating by Moody’s surprisingly had a limited impact on the price of the precious metal as the markets had already priced-in this development.

Technical analysts are now advising that gold needs to break above its important resistance level located at $1,738 per oz in order to test the $1,746-49 region. Longer-term forecasts suggest that gold could climb to hover about $1,750 per oz during 2013 although it may peak at $1,800 per oz amid an improving US economy.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.