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Crunch Time for Gold Again

NEW YORK ( Fabian Capital Management) -- The looming Federal Reserve meeting on Wednesday has many market watchers on the edge of their seats, waiting to see what happens with the outcome of the taper debate.

Some are calling for a big reduction in the asset purchase programs, while others are forecasting a more modest slowdown. The final decision will ultimately play a huge catalyst in the future price trend of stocks, bonds and commodities. But one asset class that will certainly see some additional volatility in the weeks ahead is gold.

We saw the SPDR Gold Shares ETF (GLD) fall out of favor in the beginning of the year and decline precipitously until it bottomed in July. Since that time, a snapback rally alleviated some of the downside pressure but this fledgling uptrend may be facing its most critical test in the near future.

Courtesy of StockCharts.com

In my opinion, GLD needs to hold the $125 level in order to retain its technical strength and continue to gain additional steam. If it can form a higher low and blast off above its August high, then we may see a run for the 200-day moving average (red line) which would bring additional asset flows back into this sector.

The Bull Case

The Fed may ultimately be the catalyst that sets this precious metal on fire as Chairman Ben Bernanke's comments generally tend to fuel speculation about inflation, currency risks and economic growth potential. These are all key elements in the fundamental case for owning gold along with the safe haven aspect of a hard asset in favor of paper stock or bonds.

If we see a misstep by the Fed this week that sends stocks lower, then we may witness a flight to quality back into GLD and other precious metals exchange-traded funds.

Another supportive factor in the gold debate is the deterioration in the U.S. dollar index, which has been under pressure since the July low in gold. A weaker dollar is typically bullish for precious metals.

The Bear Case

On the flip side, Goldman Sachs recently forecast that gold would fall to new lows on the back of a fresh acceleration in the U.S. economy in 2014. There is certainly a case for this to occur if the Fed gives the market what it needs and we see a liftoff in stock prices.

This scenario would likely negate the safety trade in gold and lure risk takers back into stocks and other high-yield securities.

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