The answer to why gold prices are going down today isn’t hard to find – it’s a testament to the power behind Fed Chairman Ben Bernanke.Comex August gold fell $76.50, or 5.56%, to 1,229.50 in early morning trading Thursday. The August contract traded as low as $1,285.00 in overnight trading as the U.S. dollar rose to the highest in more than a week against six major currencies.
Gold prices plunged Thursday to near three-year lows as precious metals investors took a “risk-off” stance following Wednesday’s FOMC meeting. Bernanke announced that the current $85 billion worth of monthly bond purchases could slow near the end of this year, and end in 2014, if the economy keeps improving.
He said interest rates could increase “far in the future.”
Money Morning’s Global Resources Specialist Peter Krauth explained why gold prices are down after the Fed news in a note Thursday morning to his Real Asset Returns service subscribers:
“General markets sold off pretty hard yesterday, especially following comments by Bernanke after the Fed’s latest FOMC meeting.
The S&P 500 is up over 20% since November with barely a break, so any short term weakness is totally normal and certainly healthy. Concerns about eventual QE ‘tapering’ are, in my opinion, an excuse to correct.
But that’s also hurting precious metals. Gold was down about $20 yesterday immediately following Bernanke’s comments, then down an additional $50 between 3 a.m. and 6 a.m. today as Asian markets reacted to the Fed. Silver is trading below $20 for the first time since the fall of 2010.”
Also dragging the yellow metal and other commodities lower was the yield on the 10-year Treasury, which reached a 22-month high Thursday.
Gold, down 17% since mid-April, has lost 23% this year and is on pace for its biggest annual drop since 1981.
So what should gold investors make of the news? We asked Krauth to share his take:
“Gold and silver may be taking a hit, but that’s also normal given that it’s been up 12 years straight and was due for a strong correction, and all the talk of supposed eventual Fed QE ‘tapering,’” said Krauth. “But it’s time to buy gold and silver in increments while it’s still cheap.It’s certainly not time to sell.”
The Fed and Gold Prices
Since 2008, commodity markets have been propped up by the devaluation of the dollar, thanks to quantitative easing. Now, with the Fed hinting it could take the punch bowl away later this year, markets are jittery.
Bernanke has said that as long as inflation is below 2% and unemployment above 6.5%, QE is likely to continue. Right now, government-reported inflation is 1.4%, and unemployment ticked up last month to 7.6%.
Krauth said investors should be cautious about what happens after the ‘taper’ actually starts.
“The Fed’s own economic forecast hints at a bit of optimism for growth,” explained Krauth. “I believe any market optimism is coming from a rising stock market, thanks to massive liquidity, and a rebounding housing market, thanks to very low mortgage rates. Both of these are courtesy of the Fed’s easy money policies. So guess what happens when they ease up on the easing?
“I think there’s a good chance markets will head south when the Fed eases up on the easing, and the Fed will subsequently come back with an even bigger QE program. That is, after all, the only thing it really knows how to do well,” Krauth continued.
For now, with interest rates low for the foreseeable future, Krauth said investors need to consider the value of gold.
“Investors need to keep in mind that the Fed is still subjecting them to financial repression, by not allowing savers a fair market rate on their money,” said Krauth. “This of course, is achieved by keeping rates low, and buying $1.02 trillion worth of bonds per year. There’s no question that true inflation is way above the measly “official” 1.4%. So investors need to look at ways to preserve their capital and protect it from the ravages of inflation.”
“The bull markets in gold and silver are not over,” wrote Krauth. “Do not sell your metals, instead, sit tight or buy more in tranches if you feel you don’t yet own enough.”
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