In the Wake of the Fed

In the Wake of the Fed

What a move… in the wake of Wednesday’s FOMC meeting, risk assets across the board have sold off in a dramatic fashion.  During Federal Chairman Ben Bernanke’s testimony, he stated that should economic indicators continue to improve, the Fed would be in a position to reduce bond purchases through 2013 and even completely cease by 2014.  The USD screamed higher, bond yields improved, and commodities collapsed in the overnight session.   By the time gold arrived in NY Thursday morning, it was already down 5.5% and was down 7.4% by end of day.  Silver has fared even more poorly than gold and was down nearly 10%.  Even with equities selling off, gold has been unable to find bids in the face of USD strength, moderate inflation indicators, and general positive economic news.  Until equities lose ground due to economic and global uncertainty, instead of to the prospect of higher USD interest rates, gold will find it difficult to rally.

From a supply perspective, gold does have an ace in its sleeve around these levels.  The average all in cash cost for a gold producer these days equates to about $1,200 – $1,250 per ounce.   That cost includes salary for workers, admin costs, energy, mine on-site exploration, and financing.  With gold challenging this threshold, the economic feasibility of mine sites comes into question.  If gold pushes much lower, mine sites will shut down which will limit the supply of gold hitting the market.  

Physical premiums, especially in silver, have been trending lower over the past month.   Should we see a continued sell off in gold and silver, I would expect silver premiums to move back up again.  Value dates are already being pushed out on silver from today’s price action alone.  Gold shipment dates should remain fairly current but premiums on percentage based gold products such as eagles may creep higher to offset the move lower in spot.

All Things Considered – John’s Commentary