Gold rallies on call for more stimulus

Gold rallied again on word from Reserve Bank President Charles Evans called for further monetary easing. Evans called for continued stimulus and that more quantitative easing is necessary in order to get the US economy back on track and reduce unemployment.

By Alix Steel, The Street
Tue, Aug 30, 2011 10:34 AM
MSN Money

Gold prices were rallying Tuesday as Chicago Federal Reserve Bank President Charles Evans called for further monetary easing.

Gold (-GC) for December delivery was soaring $43 at $1,834.60 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,836.40 and as low as $1,786.20, while the spot gold price was popping more than $38, according to Kitco's gold index.

Silver (-SI) prices were up 98 cents at $41.53 an ounce. The U.S. dollar index was up 0.5% at $74.02, while the euro was down 0.7% against the dollar.

Gold prices were catapulting after Evans said on CNBC that more quantitative easing is necessary. During the interview, Evans called for continued stimulus until the unemployment rate falls to 7% or until inflation surges past 3%. The Fed's threshold is 2% for inflation, and raising the limit for higher prices leaves a lot more breathing room for the Fed to print more money. Core inflation is currently 1.6%.

Evans does have voting rights, according to the Federal Reserve's website, but his view will have to contend with others that are more worried about inflation than the possibility of a double-dip recession.

At the last policy meeting in early August, Presidents Kocherlakota, Plosser and Fisher all voted against keeping rates low until mid-2013, citing inflation and the fact that a lot of the liquidity the Fed has pumped into the market remains sidelined.

This divergence puts a lot of strain on the Fed's next Federal Open Market Committee meeting in late September, but Evans' comments were just what investors needed to pile into gold. More money printing means higher inflation, which makes gold a better investment than a devalued dollar in the bank.

Adding fuel to gold's fire was Standard & Poor's downgrade of eurozone 2011 growth estimates to 1.7% from 1.9%. Germany didn't survive unscathed -- its 2012 economic forecast was slashed to 2% from 2.5%.

Some technical traders, however, don't expect gold's rally to last. J.W. Jones, analyst at OptionsTradingSignals.com, is noticing a head and shoulders pattern in the gold chart, which can be a bearish signal.

"If you look at the daily chart . . . we do have an interesting pattern on gold . . . (a possible) topping pattern," says Jones. "If I'm an investor, I am not taking gold long until I see a breakout in gold above recent highs." Jones is a long-term bull on gold, calling it a senior currency, but is bearish in the short- to medium-term.

"From a safety standpoint, if I live in the Eurozone and I have all these headwinds . . . my currency could be drastically devalued in a short period of time." Jones warns that if the chart pattern plays out then gold could correct to the $1,490-an-ounce level.

Jones isn't the only one noticing this pattern, however, and many traders will be looking to bet against prices to profit from a correction. But if a correction doesn't come and gold prices stay high, those traders will be forced to cover those short positions, which in turn will drive prices higher. Then, Jones says, "we are off to the races."

Browse Jim Cramer’s top stock picks