Gold price looks set to end the week on a positive note – in Euro terms now only 4% away from making new weekly closing highs

Once again it is the € gold price that is leading the way, currently back above €1300 and looking like having its best weekly close in 6 weeks. In fact gold priced in €s is only 4% away from making fresh weekly closing highs.

Gold €:

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In terms of $ gold the tight trading range that we’ve now been in for 9 weeks looks set to continue. In fact on a weekly basis gold has been trading in one of the tightest ranges in over a year (just before the gold price explosion last summer), $1625 marks the top and $1570 marks the low.

Gold $:

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It’s hard to see what would shake gold out of this trading range this side of the next Fed meeting scheduled for the beginning of next month. Everyman and his dog knows that the Fed ‘stands by ready and able’ to pump more money into the system if/when it is required, which they will – what is unclear is whether this happens at the next Fed meeting.

Michael Pento of Pento Portfolio Strategies is speculating that when the ‘monetary ease’ does come in the States, it will come in the form of removing the interest the Fed pays on the excess reserves held by the banks with the Fed.

Currently there are some $1.4tn in excess reserves that are laying fallow at the Fed – and earning the banks 0.25% in the process. Removing this interest paid on excess reserves, which has been effectively bribing the banks not to flood the market with new credit, would mean that banks would look for a home for all this cash.

Most likely it won’t find its way into new loans for businesses and individuals, but rather will be funneled into more loans to the government – which is beginning to look like the plan all along.

To put $1.4tn being released from excess reserves into perspective Pento notes;

Commercial banks currently hold $1.42 trillion worth of excess reserves with the central bank.  If that money were to be suddenly released, it could, through the fractional reserve system, have the potential to increase the money supply north of $15 trillion!

Here is what the explosion of excess reserves looks like in one very scary looking chart:

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If indeed Ben Bernanke does go this root and reduce the interest paid on reserves to zero, expect the gold market to get the joke in very short order.

It is probably also worth mentioning that back in 2009 when people were getting concerned about the parabolic nature of the excess reserve chart above, Ben Bernanke was forced to write and OpEd in the WSJ explaining his ‘exit strategy’, he noted:

These reserve balances now total about $800 billion [now increased to $1.4tn in 2012], much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.

But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures—unless we adopt countervailing policy measures. When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy.

All talk of ‘eliminating these large reserves now seems to be completely forgotten – in fact it now looks like that rather than eliminating these reserves the Fed might be contemplating doing the exact opposite and push these funds into the economy. Bernanke continues:

To some extent, reserves held by banks at the Fed will contract automatically, as improving financial conditions lead to reduced use of our short-term lending facilities, and ultimately to their wind down. Indeed, short-term credit extended by the Fed to financial institutions and other market participants has already fallen to less than $600 billion as of mid-July from about $1.5 trillion at the end of 2008. In addition, reserves could be reduced by about $100 billion to $200 billion each year over the next few years as securities held by the Fed mature or are prepaid. However, reserves likely would remain quite high for several years unless additional policies are undertaken.

So back in the summer of 2009 Bernanke was trying to tell the world not to worry about these excess reserves because they ‘will contract automatically’. Rather than contract automatically excess reserves have in fact doubled since he penned this piece. Just another in a long line of failed prediction’s by the money-printing-in-chief.

We’ve got a couple of weeks before we find out if Pento’s prediction is correct, but if he is look for gold to break out of that tight trading ranged in seconds.

In terms of £ gold, it’s looking very much like that it’ll close out the week around the £1020-5 level for a third week in a row:

Gold £:

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Related posts:

1. The gold price ends the month of May up in Euro terms – but dollar strength continues to hold it back
2. Gold price only 6% away from making all time highs in Euros
3. Gold price drifting lower in $ terms – still up on the day in terms of £s
4. Gold price softer today after closing at the top of its ‘box’
5. The gold price weekly wrap

Link to this article: : http://www.goldmadesimplenews.com/gold/gold-price-looks-set-to-end-the-week-on-a-positive-note-in-euro-terms-now-only-4-away-from-making-new-weekly-closing-highs-7331/

Posted by Thomas Paterson on Jul 13 2012. Filed under Analysis, Gold News, Markets. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.