Gold has not been doing all that well of late. But after Ben Bernanke of the U.S. Federal Reserve continued to allay market fears over an imminent tapering-off of the Fed’s asset-buying stimulus program, hedge funds went ahead and raised their bets for gold rising even higher for the second straight week.
Bloomberg reports that speculators raised their net-long position 4.1 percent, up to 36,691 futures and options.
To recap: after 2008, gold kept rising until it hit a record high of $1,923.70/oz in September 2011. This rise was accompanied by the Fed’s sustained purchase of debt and pressure exerted on interest rates to keep them at record lows.
But this April, gold crashed as investors apparently lost their sure faith in what has traditionally been a very conservative safe-hedge bet.
“Bernanke’s comments put some positive feeling back into gold and into all commodities,” said Dan Denbow, a fund manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio. “The Fed has been working hard to show that taking back a little bit of bond buying isn’t removing accommodation, and Bernanke was very firm on that. There was a bit of a sentiment shift.”
The Comex last week saw gold futures rise 5.4 percent, up to $1,227.60. Bullion for August delivery closed at $1,283.50 yesterday (up 0.5 percent). Meanwhile, commodities also showed similar gains. The S&P GSCI Index, which tracks 24 commodities, rose 1.7 percent the past week, while the MSCI All-Country World Index of equities gained 3.4 percent.
Let’s be clear about the implications here. This recent rally means gold has now erased most of the losses it incurred after Bernanke’s remarks about the tapering-off, which were made on June 19. That’s when he suggested that the Fed might consider winding down the stimulus program sometime around the end of this year or early next year, thus sparking a spate of sell-offs.
Nonetheless, gold is still down overall for the year—23 percent, in fact.
There are complications, however. The April bear market had a lot to do with U.S. inflation not being quite as high as anticipated. Now, I’ll note that interest rates have been rising across the board—mortgage, home prices, and so on. Also, the dollar has been strengthening in the recent past. All that could mean the present gains in gold may not be a long-term trend.
For the week ending July 10, money managers pulled $1.42 billion in total from gold funds, while commodity funds saw outflows totaling $1.68 billion.
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Recent Gains: A Bad Forecast?
The recent gains, as CNBC notes, can largely be accounted for by anemic U.S. retail sales, which raised hopes that the Fed might have to keep its stimulus program going for longer, after all.
After Bernanke’s clarification that the Fed will indeed stick to a highly flexible, accommodative policy (thereby opening up the option of keeping interest rates low), gold hit a three-week high; however, the overall situation remains rather volatile.
“It appears that gold is benefiting from signs that support Bernanke’s attempt to calm market fears [like weak U.S. economic data],” Deutsche Bank analyst Michael Lewis said. “But I think the metal is likely to remain a bit vulnerable in a period of uncertainty before the Fed actually embarks on the stimulus exit.”
Retail sales rose just 0.4 percent through June—much less than expected—which fanned fears of a growing slowdown in the nascent U.S. recovery. 10-year Treasury yields were below 2.6 percent. That’s a good thing, as falling returns from U.S. bonds mean gold gains in attractiveness.
Tomorrow and the day after, Bernanke is set to speak before Congress, and it’s really a fair expectation that we’ll get more details regarding the Fed’s position on tapering off the stimulus program. Expect further reactions from the markets based on what emerges tomorrow and Thursday.
The main thing to bear in mind regarding the Fed right now is that it’s pursuing an accommodative policy. This means it’ll be more flexible than usual. Should the nation’s economy continue to demonstrate steady—if minuscule—growth overall, the Fed may well persist in tapering off its stimulus program late this year or early next.
However, if signs grow that the recovery may be faltering or weakening critically, the Fed seems prepared to step up its asset-buying pace. Right now, the main thing to watch for is whether gold will break $1,300 or continue staying below it.
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