Inside Bernanke 8217 s Golden Triangle

Gold and bond yields are on the urge of a breakout (in opposite directions) as the Fed decides on rates.

Fed Chairman Bernanke will prove to the world tomorrow he can still “speak Japanese” as he sticks to the treatment of quantitative easing, first delivered by the Bank of Japan in the mid 1990s.

Markets’ attention is shifting to the immediacy of the US debt ceiling, which takes precedence over the Fed’s language/guidance on for 6-12 month’s horizon.

Five-year lows in jobless claims and five-year highs in equity indices support the case for reconsidering QE3 duration, but periodic disappointments such as 15-month lows in US consumer confidence and occasional misses in housing mean the doves will continue to get the upper hand over the hawks at the Fed.

Gold may never run out of “fundamental factors” courtesy of growing asset purchases from the world’s four largest central banks. Nonetheless, technical dynamics are no longer as robust as they were last year. Technically, the 100-week moving average continues to provide remarkable support –from 1527 in May to 1626 in January. The more challenging part is capturing (and timing) the upside. Considering the three-month trendline resistance near $1700, we find the improving stochastics to carry sufficient momentum in breaking above the trendline, but question marks are now appearing near 1730.

US 10-year yields have broken their two-year trendline and set to test the 2.0% barrier. Failure of a break above 2.0% will likely see support neat 1.87% (from current 1.97%), before a renewed upside attempt, with 2.38% being the key intermediate target.

Wednesday’s FOMC decision is widely expected to show the continuation of $85 bn in combined monthly asset purchases (US treasuries and agency securities), which should sustain gold’s support for now, from 1660 to 1700s, until encountering fresh resistance near 1720s. Any decline below 1640 implies the Fed’s failure to convince markets of its asset purchases program.