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Gold Falls on Fed Inaction

Written By Brian Hicks

Posted June 22, 2012

Gold fell 2.5% on Thursday in the biggest 1-day drop since February after the U.S. Federal Reserve’s monetary policy meeting ended in an extension of “Operation Twist,” a decision which failed to quell fears of an economic slowdown. This 2.5% was enough to nearly destroy all gains in gold for the year to date, Reuters reports.

The Fed’s Wednesday meeting resulted in a decision to continue lowering interest rates instead of installing an anticipated new round of monetary easing. A gold selloff followed and prices were down to $1,566 an ounce by 3:05PM EDT, reducing the precious metal’s security against inflation.

Just last year the price hit a record high of $1,920.30 per ounce, and earlier this year the Fed’s promise of low interest rates brought it up 15%. The Fed’s inaction, however, has reversed this climb. Silver was also down 4% to $26.90 an ounce on Thursday.

New data was also released showing anemic American manufacturing, a consistently-contracting Chinese factory situation, and the continuing euro problems, contributing to intensifying deflation worries. The new numbers further increased market apprehension of a global economic slowdown.

Jeffrey Sica, chief investment officer at SICA Wealth Management LLC, commented:

“When you see slowdown in China and in the United States and the debt crisis accelerate in Europe, it leads people to believe that we will have significant depreciation, especially when commodities and precious metals prices have been so tied into the monetary policy.”

But despite the gloomy news overall, officials like Sica believe gold will recover over the long term. The instability we see now will eventually lead to what Sica called a “fear trade,” bringing gold back up once again.