Bargain hunters, bottom fish, and short covering traders sent prices back into positive territory on Monday after Federal Reserve Bank of St. Louis President James Bullard said, with an important set of caveats, that tapering will become increasingly likely as long as the labor market continues to improve.

"A small taper might recognize labor market improvement while still providing the Committee the opportunity to carefully monitor inflation during the first half of 2014," Bullard said in prepared remarks of his speech. 

"Should inflation not return toward target, the Committee could pause tapering at subsequent meetings."

NASDAQ gave a quick primer on all the moving parts in the gold price equation. And, although we are traders and investors, it never hurts to take a 15-second refresher course:

"In part, the gold market is suffering thanks to the economic recovery. Since gold is usually seen as a 'safe haven' investment, an improving economy puts downward pressure on gold prices. Other headwinds include low inflation rates, surging equity values and an overwhelmingly bearish sentiment facing commodities altogether.

...It's never a bad idea to devote at least a small portion of your portfolio to precious metals. Since these assets are generally insulated from rising price levels, metals like gold are a good way to hedge against inflation risk."

Essentially, one never knows what will happen in the wild and wooly world out there and gold always has and always will play its role.

Back to the Fed. "The sooner we say we're going to end this program once we've purchased X, the sooner we say that, the better," Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said Friday. "It's that constant uncertainty about what we'll do at each and every meeting that I think we can eliminate this way, and we'll be better off for it, and we'll not sacrifice much of the benefits of the program."

Here is an interesting proposal, certainly. But, wouldn't reducing the $85B per month in asset purchases by 15 billion in one meeting, then another 15 and another, have the same impact and force analysts and traders to slowly adjust? Everyone could then see scenarios unfold over a longer time frame. Given human nature, if a date - say mid-2014 - is given, most money people will sit tight and wait until the last possible moment.

There is a deep concern at the Fed, which often goes unvoiced, about deflation. While higher employment figures are a must, don't expect a lot of movement on tapering, and certainly not on the basic interest rate, until inflation moves closer to 2%.

As always, wishing you good trading

Gary S. Wagner- Executive Producer

Market Forecast:

Last week it was all about bearish sentiment, how much of it, and how long we would continue to see this sentiment prevail. As gold prices reached an intraday low last week of 1211, many analysts looked at the possibility of retesting our recent lows of 1181. It seems, however, that gold was able to find a supportive price point at approximately 1225 per ounce.

Inasmuch as we have seen some real support enter the market vis-à-vis short covering and bargain-hunting, I draw your attention to the most recent release by the CFTC's commitment of traders report. You can view the report in the chart gallery section of the member's page (chart 7). Noteworthy is the section on managed money that details the change in commitments. Managed money added 52 contracts from the long side, and added 6072 contracts on the short side. At the same time we had an overall decline in open interest of almost 8000 contracts. When you have open interest that is contracting, and managed money that is adding to the short side of the fence it is certainly something we need to watch.

Proper Action

Maintain Gold Short at 1276  move stop down to  1251  ...  Maintain Short silver @ 20.47 move stop down to 20.25

COT LINK  See previous weeks in Historical Commitments of Traders Reports.

Click on Chart below for current chart gallery