Well what a week it has been for gold and the precious metals. This past week saw gold prices fall from near the $1400 area to well below the $1300 level. This past week’s FOMC announcement and the Ben Bernanke press conference that followed have caused markets to shudder. The great debate appears to now be over….
For several weeks now, global markets have been pondering the future of the Fed’s quantitative easing program, and it now seems that we have a good deal of clarity on the subject. The Fed Chief’s comments were interesting in that on one hand the FOMC seemed pleased with how the economy has been performing. In fact, the fed discussed how it sees the unemployment rate dropping to 6.5% in 2014.
This is worth noting for several reasons but the primary one being that the fed originally did not see the unemployment rate dropping to that level until 2015. The 6.5% level is key because that is what the fed intends to use to make monetary policy decisions. Basically, once that level is hit the fed will likely begin the tightening process. Well it sure seems that the markets see the writing on the wall. Following the FOMC this week, investors began to sell risk assets at a very fast pace, and the “Risk off” mentality is still very strong here at the end of the week.
One can simply look at what the benchmark U.S. SP500 index did this week. The broad stock market dropped following the FOMC on Wednesday and sold off yesterday to the tune of over 40 points or about 2.5 %. People that have been long equities are continuing to unwind those positions today with the SP down almost another .5% today. Where will the selling stop? Nobody knows. It does seem however, that the markets now have their answer on whether or not equities can continue their climb without QE.
How will this effect gold prices? This too is impossible to say. Thus far gold has been bludgeoned again this week as longs continue to bail. From a fundamental standpoint this makes some sense. After all, the dollar has strengthened this week which is typically a gold price negative. With the fed getting ready to begin tapering its bond purchases, it also appears that the time of easy money will soon be behind us. This leaves gold for right now lacking a catalyst for higher prices. The key being right now..
As we all know, that can change very quickly. Despite all of this selling in recent months, it would be premature to call the bull run in gold dead. The charts do however, point to lower prices to come. These lower price levels may prove to be great buying opportunities. In the meantime,demand for physical gold remains fairly consistent, although thus far demand has not been equivalent to that reached in April.Perhaps gold buyers see lower prices coming and are simply being patient to buy gold at a further discount.
