Gold reacts negatively to bernanke’s remarks

Investors have been desperately hoping for positivity in Bernanke’s recent comments, poring day over day, meeting over meeting, month over month for clues to QE3. Last week, on Wednesday, everyone was anxiously waiting for the FOMC minutes in order to search for these clues that could give the slightest idea QE3 was imminent. Unfortunately for them, that was not the case and equities suffered. Today Bernanke appeared at Senate to give his semi-annual monetary policy testimony with investors watching it, but again, no luck!

During his testimony, Ben Bernanke warned about increasing risks to economic growth, mainly as a consequence of the Eurozone Sovereign debt crisis and the US fiscal situation (and that sooner or later will lead to some tightening policy, probably just after the November election). He sees economic growth decelerating and job creation as being frustrating slow. In fact, last week, the FED downgraded US growth for the current year by half a percentage point to 1.9% from 2.4%. Today Bernanke is assuming 2% as the growth expected for the year.

Ben Bernanke continues to kick the can down the road and it is increasingly likely that a new round of monetary easing will never happen, at least any time soon.

Equities are suffering from Bernanke’s testimony and gold is one of the losers for the day. The precious metal is extremely sensitive to changes in interest rate expectations and currency debasements. When interest rates decrease, investors earn a very low income by depositing their money with banks. That income may be even negative when inflation is above the nominal interest rate, making gold an attractive investment. In periods of a depreciating US Dollar, the cost of holding gold also decreases since the metal is priced in the US currency. 

Under the current environment of low interest rates, gold is favoured, but as QE3 expectations erode, prospects for the US Dollar are improving and the costs of carrying gold become larger. That’s why investors have been selling the metal after the last FOMC minutes were released and after today’s Bernanke testimony, as noted by the two ovals in the above graph. As we can see, the precious metal was under pressure the day following the FOMC minutes release and with a second blow in less than a week, gold may be in trouble again over the next few days. Problems coming from Europe may also lead investors to seek for the safest asset they know, the US Dollar, and so sell their gold holdings.