Bernanke to Drive Gold, Commodities

NEW YORK ( TheStreet) -- The Federal Reserve continues to push market expectations in one direction, then the next. The central question is whether or not we will see reductions in quantitative easing stimulus this September, and we have seen statements from Ben Bernanke which suggest a few different scenarios are possible.

This week, we will have additional clues, as the Fed chairman gives his semi-annual testimony before Congress. Bernanke's level of confidence in the U.S. economic recovery will determine the near-term direction in stocks, commodities and the U.S. dollar. For investors with exposure to gold in instruments like the SPDR Gold ( GLD), gains will require a dovish outlook and an expressed willingness to maintain stimulus programs -- even if the labor market continues to improve at its current headline rate.

Most recently, this is the message that has been sent to the markets. For gold prices, accommodative policy suggestions have helped generate a short-term rally after the metal hit yearly lows near $1180 per ounce last month. Continued quantitative easing stimulus is supportive for precious metals, as it indicates declining Treasury rates, a weaker U.S. dollar, and upside inflation risks. But while Bernanke's testimony on May 22 suggested stimulus might continue, the Fed has also released timelines detailing potential exit strategies for these historic programs. For these reasons, we are now in an environment where the Fed's interpretation of macro data is much more important than the market's consensus expectation for those reports, and gold investors will need to place a larger focus on statements made by policymakers in order to gauge the next direction in valuations for the metal.

Market Positioning

Bernanke's Congressional testimony this week will be the next chapter in the Fed story, and a key short-term driver for gold and commodities as a whole. Given the conflicting viewpoints the Fed has expressed in the last few months, it is highly unlikely any outcomes here will mark the final word on the topic. Not only will investors need to be aware of the level of dovish bias expressed by Bernanke at his official testimony, but in his accompanying press releases as well, as these venues have been used to make additional clarifications that have reversed market direction in short order.

Not surprisingly, there is a good amount of trepidation in gold and commodities markets, given the large volatility increases seen in assets like gold and oil so far this year. Given the consistent back-and-forth in the Fed's stated bias, it makes little sense to establish new positions in gold ahead of critical event risks like Bernanke's testimony this week.

But if we look at price activity itself, gold prices are holding near their highs for the month. We have yet to break above a key psychological level at $1,300 per ounce, however, and when we look at the longer-term charts, gold is showing its longest trading stretch below its 200-day moving average since its 12-year bull run started in 2001. This tells us that the market is positioned for dovish comments from Bernanke this week, but that the longer-term picture is far less optimistic.

If this week's expectations are satisfied, expect gold to push through the "line in the sand" at $1,300. This does appear most likely, given that Bernanke's recent statements have been in support of continued stimulus. If not, however, the downside reaction in gold will likely be far more pronounced, as short-term term bulls are forced to reverse their positions.

This scenario would weigh on stocks and commodities as a whole, while acting as a benefit for the U.S. dollar. Either way, Bernanke's comments this week should set the tone for the rest of July. Those looking to get back into gold at cheaper prices should be prepared for increased volatility toward the end of this week.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Cox is a university teacher in international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of websites, including, Seeking Alpha, FX Street, and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.