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FOCUS: Bernanke’s Comments On Fed Tapering Are Negative For Gold

By Debbie Carlson and Allen Sykora of Kitco News
Wednesday June 19, 2013 4:45 PM

(Kitco News) - Gold prices fell after a statement of the Federal Open Market Committee and press conference by Chairman Ben Bernanke Wednesday suggesting that if economic conditions continue to improve, the Fed will start tapering its stimulus program.

Equity markets also fell, while the U.S. dollar and U.S. Treasury yields rose, and analysts said those markets acted as if the tapering of the stimulus programs will happen much faster than what Bernanke outlined in his press conference.

The initial reaction by the markets was muted, but as Bernanke spoke, the markets extended their moves in the afternoon. Comex gold futures ended their day-session trade ahead of the FOMC meeting, settling at $1,374 an ounce, but prices crumbled after that.

“The most reliable reaction to Bernanke was in the currency and bond markets. They’re taking a more hawkish view,” said Alan Bush, senior research analyst at ADM Investor Services.

Bernanke said the Fed would begin tapering purchases later this year, if the economic data continued to improve. If that is the case, tapering could continue into the middle of next year. But he stressed several times that “policy is not pre-determined.”

For now, the FOMC said they will continue to buy $85 billion in U.S. Treasury and mortgage-backed bonds each month.

He Bernanke said if the economic data is sluggish, they may buy bonds again. “We’re only slowing the pace. We’re easing the pressure on the accelerator. Raising short-term interest rates is far in the future. There’s no change in policy. It’s simply a clarification,” he said.

But that’s not how the markets are reacting, Bush said. “That’s not the message they’re getting. (Kansas City Federal Reserve President) Esther George said the exact same thing. The markets are taking tapering as a tightening,” Bush said.

Despite Bernanke stressing they were trying to clarify their comments, not everyone took it that way.

Charles Nedoss, senior market strategist with Kingsview Financial, said Bernanke at times spoke of the possibility of tapering, yet also kept emphasizing no decision would be made as it would depend upon the data.

“The Fed is painted in the corner,” Nedoss said. “They are talking out of both sides of their mouth…There is still a cloud of uncertainty as to what is going to happen.”

Bill O’Neill, principal at LOGIC Advisors, said the comments “lean a bit bearish toward gold.”

The committee said it saw “diminished” risks to growth and the jobs market. It now forecast the jobless rate at 6.5% in 2014, a year sooner than previously forecast. They also reduced their forecast for 2013 inflation, but said the cooling of inflation would be temporary. FOMC members said they didn’t expect their first rate hike to occur until 2015.

Bush noted that the Chicago Board of Trade March federal funds futures are pricing in a tightening in early 2015. Since Tuesday, the March fed funds futures contract fell seven basis points to 99.5650. “That could mean a tightening as soon as March (2015),” Bush said.

Bernanke in his press conference said the change in the FOMC statement is a little more upbeat. “The fundamentals look better to us,” Bernanke said regarding the FOMC’s outlook.

That pressured gold and allowed the dollar to rise, said Phil Flynn, senior market analyst with Price Futures Group.

Still, gold is holding above its lows from this spring, even though Treasury yields have soared to longtime highs. The 10-year Treasury yield rose as high as 2.329%, its most muscular level since March 2012.

“If you step back and get through the emotions and knee-jerk reactions of what the Fed is saying, the slow tapering off of stimulus isn’t necessarily going to be death knell for gold,” Flynn said.

With any weakness in the stock market, investors may money may look for alternative places to park their money, Flynn said. This also could be a case if less “hot money” flows into emerging markets, he added.

Gold also may hold up relative to the bond market since the yellow metal already may have done more work to price in expected tapering, Flynn said.

“Gold has sold off pretty substantially,” Flynn said of declines this spring. “It’s almost like, ‘is gold reacting to the Fed, or is the Fed catching up to the gold market?’ The gold fell long hard long before the Fed started talking about the tapering….It seemed like the gold was more visionary in what the Fed may be doing with stimulus before the bond market was.”

Higher bond yields and a stronger dollar can both weigh on gold prices. Higher bond yields draw investors away from assets like gold that pay no yield. Since gold is dollar-denominated, the two often have an inverse relationship, meaning when the dollar rises, gold falls. Further, a stronger U.S. dollar versus other currencies can make it more expensive for investors to buy gold using non-dollar currencies.

Any move toward tapering could mean some uncertainty about the global economy will respond, thereby providing some underpinning for the yellow metal, Flynn said.

LOGIC’s O’Neill is less upbeat on gold. He said it’s possible that gold could test the spring lows, noting that there is technical chart support between $1,338 and $1,350.

“The Fed’s views could precipitate a move to the spring lows. The market sentiment is not good. We’ve seen liquidation in the exchange-traded funds,” he said.

He also noted that physical demand, which was strong in late April and early May after the $200 an ounce price break, has eased. “The demand just isn’t there,” he said.

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By Debbie Carlson and Allen Sykora of Kitco News; dcarlson@kitco.com, asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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