Gold and silver fell sharply Wednesday after traders interpreted Fed Chairman Ben Bernanke’s Congressional testimony to mean another round of monetary easing is less likely than expected.
Bernanke also warned that the rise in gasoline could spark temporary inflationary pressure.
Cheap money has been one factor driving investor demand for the precious metals. If interest rates start to rise, the cost of owning a non-interest bearing asset such as gold or silver will rise, too making it less appealing to own the asset.
Both gold and silver had their worst one-day price declines since September. The most actively traded gold ETF, SPDR Gold Trust traded more than twice its three-month average daily volume.
“Bernanke said that another round of bond buying is not off the table,” says Shelley Goldberg, Roubini Global Economics.
But, the overall perception in the market is that there will be less of a need for another round of quantitative easing—or QE3—and that has rallied the dollar and sent commodities lower. Goldberg, however, said the fact that oil prices are relatively high, while gold sells off, is in itself further proof that gold is not an ideal inflation hedge.
Another factor is “talk that Iran is going to take gold as payment for any kind of transaction including oil,” Goldberg says, adding it “could also be perceived as bearish for gold as it releases additional gold onto the markets.” However, she does not see much chance of that happening.
And while Bernanke might have been the spark, other factors were in place for a selloff including, profit-taking.
“In recent trading gold neared, but was unable to get over the most recent high of $1,803 per ounce set in November 2011,” says Jim Steel, HSBC Chief Commodities Analyst.
He added that “sell-stops were building under the market which were set off today.”
Sluggish physical demand from the emerging markets and a third day of declines in the price of oil also combined to pressure the metals, he says.
But Steel also believes that this could just be a pullback in a bull market and expects the metals markets to remain volatile. “Accommodative monetary policy is still there and so are the underlying factors for higher gold prices,” he says. HSBC expects the price of gold to average $1850 an ounce for calendar year 2012 with a high price of near $1950 an ounce.
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