Gold Tumbles to 2 1/2-year low in Fed bloodbath.
By: William L. Watts and Barbara Kollmeyer, MarketWatch
NEW YORK (MarketWatch) — Gold and silver futures closed at their lowest levels in more than 2 ½ years Thursday, a day after Federal Reserve Chairman Ben Bernanke said the central bank could move as early as this year to slow the flow of monetary stimulus to the economy.
Although Bernanke emphasized that the Fed’s moves would be dictated by economic data, “there seems to be a pretty broad expectation that [quantitative easing] is coming to an end in the next year or so,” said Peter A. Grant, chief market analyst at USAGOLD.
Global markets sink on Fed fears
Markets in Europe and Asia were broadly lower following Wednesday’s selloff in the U.S.
Gold for August delivery (CNS:GCQ3) dropped $87.80, or more than 6%, to end Nymex floor trade at $1,286.20 an ounce — the lowest closing level since September 2010, according to FactSet data.
It was similar story for silver futures, with the July contract (CNS:SIN3) falling $1.80 to finish at $19.82 an ounce
Analysts described the carnage as a “bloodbath,” with gold and other metals tumbling alongside other commodities in a broad selloff that swept across asset classes.
Gold is seen as particularly vulnerable to a withdrawal of Fed liquidity, having built much of its previous rally on ideas aggressive monetary easing threatened to debase the dollar and other currencies and stoke inflationary pressures.
With bond yields rising rapidly, analysts said gold and other commodities which offer no yield are poised to suffer since they offer no yield.
After slightly trimming initial losses, gold slipped back below $1,300 an ounce after data showed existing U.S. home sales rose 4.2% to an annual rate of 5.18 million in May, topping expectations for a pace of around 5 million and the Philadelphia Fed’s manufacturing index came in stronger than expected.
Earlier, data showed U.S. weekly jobless claims rose more than expected.
The U.S. dollar (NYE:DXY) shot up in the wake of Bernanke’s comments, a negative development for gold as a stronger dollar can make gold and other dollar-denominated commodities more expensive to those using other currencies.
Grant said a weak China purchasing managers’ index reading in the wake of the Fed comments contributed to a “perfect storm” that’s rocked various asset classes. And while gold is sometimes treated as a haven, the yellow metal is suffering the same fate as other commodities as investors pile into the greenback.
Futures prices initially turned lower Wednesday after Bernanke said the central bank’s purchases of government bonds may be scaled back as early as this year, if economic activity improves in line with its forecasts.
The central bank is currently buying $85 billion a month of bonds in an effort to encourage economic growth. The central bank’s bond-buying program has helped bolster U.S. equity prices, and aggressive monetary easing in recent years has been credited for helping gold prices rally.
The “fundamentals look a little better to us, in particular the housing sector, which has been a drag on growth since the [financial] crisis, is now obviously a support to growth,” Bernanke said during a news conference after the conclusion of the Fed’s two-day policy meeting.
Metals and mining-related exchange-traded funds fell sharply. Shares of the popular SPDR Gold Trust ETF (NAR:GLD) dropped 5%, while the iShares Silver Trust ETF (NAR:SLV) lost more than 7%. The Direxion Daily Gold Miners Bull 3X ETF (NAR:NUGT) , which makes a leveraged bullish play on miners, plunged nearly 20%.
In the mining sector, shares of Barrick Gold Corp. (NYSE:ABX) dropped 6.6%, while Newmont Mining Corp. (NYSE:NEM) fell 5.4%.
But if the economy “were really as strong as the messaging they’re sending, why not say, ‘We’re going to trim [monthly bond buying] back to $45 billion or trim this back to $60 billion?,” asked Scott Carter, chief executive of Lear Capital, a precious-metals retailer based in Los Angeles.
“We’re not getting any of that” from the Fed or from Bernanke, who, Carter said in a telephone interview, continued to deliver a “double message” to the markets on Wednesday.
U.S. equities tumbled after the Fed update, with the Dow Jones Industrial Average (DJI:DJIA) losing 206 points to end at 15,112.19. U.S. stocks resumed the decline in Thursday’s session, as global markets tumbled and investors sought safety in the dollar.
Before the Fed’s announcement, gold prices on the New York Mercantile Exchange settled higher on Wednesday.
Thursday’s drop has done substantial technical damage on the charts, analysts noted.
The $1,300 level, while important psychologically, also corresponds to a 50% retracement of the 2008-2011 rally, said Fawad Razaqzada, technical analyst a GFT.
The next level of support is seen at $1,285 to $1,275, where a pair of Fibonacci-related levels converge, he said, with no further significant support seen until $1,200, Razaqzada said.
In the short term, Carter expects to see continued softening of gold prices, with technical resistance to any gains around $1,300 to $1,325 an ounce.
“We’ve got to sort through what the real economy is doing versus what the Fed is doing, and that will play itself out between now and the end of the year,” he said. But looking out 12 to 36 months, “the story line is strong for gold and silver,” as debt continues to escalate world-wide, and as Europe and Japan grapple with their own economic issues, said Carter.
Even if the Fed were to cut bond purchases by half, “that’s still a lot of liquidity that’s being pumped into the market,” he said.
