Ben Bernanke’s latest statements on QE hit the gold market hard, driving prices down below the $1300 level in this morning’s trading. There could still be worse to come for the gold bulls!
FUNCHAL, MADEIRA (MINEWEB) – Some heavy selling following Ben Bernanke’s upbeat statement suggesting a cutting back of QE later this year, and a possible end next, hit gold hard overnight with the bullion price falling back close to $1300 before making a small recovery – and then falling back again in London to breach the $1300 level on the downside in a very volatile market. There were renewed sales from the big SPDR gold ETF, GLD, taking it down below 1,000 tonnes for the first time since February 2009.
SocGen’s analyst Michael Haigh was predicting a fourth quarter gold price average of only $1200 while Nouriel Roubini would have been smiling given his recent prediction that gold would fall back to $1,000. The U.S. dollar surged, seemingly yet another nail in gold’s coffin. All in all something of a perfect storm for gold bears. Could the downturn be turning into a rout?
It hard to tell through all this volatility but some of the attacks on gold are misguided. There appears to be a general belief that gold protects against inflation, thus if inflation is taken out of the equation, gold must fall. But long term research doesn’t necessarily show this to be accurate. Gold does tend to rise on fears of inflation, but some of its best performances in the past have been in recessionary periods – and most notably during the years of the Great Depression of 1929 and thereafter. We’re not saying that we are heading for a repeat of this, but the dangers that we could be falling into another such period are far from over.
The U.S. economy in particular is not yet picking up in a manner that suggests the downturn is behind us. Europe remains in a huge financial mess. Unemployment levels remain horrendous for a nation and economy the size of that of the U.S. and Bernanke latest comments suggest a major U-turn from his original statements that QE would continue until the employment situation improves substantially.
Unemployment is refusing to respond despite the billions of dollars poured into trying to stimulate the economy. Inflation remains low, although probably not as low as official statistics make out. The danger, though of calling an abrupt halt to QE, or even of cutting it back, is that this in itself could tip what is still a fundamentally weak economy into recession and possibly into depression.
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