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FOCUS: Bernanke: Gold Price Decline Suggests Less Worry About 'Extreme Outcomes'

By Allen Sykora and Debbie Carlson of Kitco News
Thursday July 18, 2013 4:50 PM

Updating earlier story with analyst reaction to Federal Reserve Chairman Ben Bernanke comments

(Kitco News) - Federal Reserve Chairman Ben Bernanke’s second day of congressional testimony did not have a major impact on gold prices Thursday, but he nevertheless raised the eyebrows of those in the industry when he offered some views on the gold market.

He suggesting the yellow metal has fallen in recent months since investors for now are less worried about needing protection in their portfolios.

The Fed chief also commented that “nobody really understands gold prices,” including him.

He made his remarks during the question-and-answer portion during testimony on the economy before the Senate banking panel. This came after an appearance before a House panel Wednesday.

“Gold is an unusual asset,” Bernanke said. “It’s an asset that people hold as sort of disaster insurance. They feel if things go really badly wrong, at least they’ll have some gold in their portfolio.”

He was asked whether he considers this accurate.

“Not all that accurate,” Bernanke said. “For example, a lot of people hold gold as an inflation hedge. But movements in gold prices don’t predict inflation very well, actually.”

He later added: “I suppose that one reason gold prices are lower is that people are less concerned about extreme outcomes, particularly negative outcomes, therefore they feel less need for whatever protection gold affords.”

August gold on the Comex division of the New York Mercantile Exchange settled after the pit session Thursday at $1,284.20 an ounce, which is a 24% decline from the end of 2012. Bernanke said “psychologically the gold price going down is not necessarily a bad thing” since it suggests investors have more confidence.

The Fed chief concluded: “Let me end by saying that nobody really understands gold prices and I don’t pretend to really understand them either.”

Gold Does Not React To Bernanke; Comments ‘Innocuous’

Analysts say Bernanke’s remarks did not appear to have any major impact on the price of gold itself. In fact, starting with the start of his testimony, the August futures had a range for the rest of the day of only $7 an ounce. The contract settled with a gain of $6.70 for the day, but was already modestly higher before Bernanke began speaking.

“There wasn’t much of a reaction at all (to Bernanke’s testimony Thursday),” said Frank Lesh, broker and futures analyst with FuturePath Trading. “Gold was just in a trading range. Like a lot of markets, the dollar will determine the direction on gold.”

Bill O’Neill, one of the principals with LOGIC Advisors, described the Fed chief’s comments about the market activity so far this year as “innocuous.” Traders have already been saying that some of the decline in gold this year was a move toward other investments, such as a rotation into a stock market that has hit record highs.

“There is no way I would regard those as anything significant or market-moving in nature,” O’Neill said.

“Gold is very much a psychological commodity. He’s kind of referring to that,” O’Neill continued, pointing out that much of the selling in gold has been the result of an exodus from gold-backed exchange-traded funds. “That was a major, major part of the decline in the market.”

And now, O’Neill continued, the recently firmer tone in gold is the result of “decent” physical demand, particularly in the Asian region, and a slowing of ETF liquidations.

George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, suggested that central-bank officials do in fact keep an eye on the metal.

“Gold has economic and political importance so central banks do look at it,” he said.

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