The Federal Reserve Bank is tapering on its bond-buying stimulus program. For a year now, the Fed has been buying $85 billion per month in US Treasury and mortgage bonds in the hopes that those dollars get circulated into the economy.
On Wednesday, outgoing Fed Chairman Ben Bernanke announced that amount will be reduced to $75 billion per month. What followed was a sell-off in gold, with the yellow metal closing at $1,193.60 per ounce, a three-year low.
(Read more: Gold sinks to 3-year low; ends at $1,193.60)
Gold is often considered by some investors to be an ideal inflation hedge because no matter how many dollars get printed, the amount of gold remains relatively stable (about 174,100 tons have been mined since the beginning of civilization, according to the World Gold Council).
Yet Sean Darby, Global Head of Equity Strategies at Jeffries Securities says investors have had an alternative purpose for gold as of late.
"In this cycle, gold has really acted as a hedge against another financial calamity and not necessarily has been a hedge against any future inflation," says Darby. He also notes an inverse relationship between gold and financial stocks. Indeed, while gold is down 29% in 2013, the Financial Select Sector SPDR ETF (the XLF) is up 32%.
"That's really been perhaps the more difficult scenario that [gold] investors have faced over the last 12 months," says Darby "Certainly, looking forward, there's not very much indication that we're going to get any inflation coming through either in the US or anywhere else."
Darby also has a surprising outlook on what will happen with a drop in gold prices. While some have argued that production will automatically stop now that prices are below $1,250, Darby says the opposite will occur – at least in the short-term.
"Ironically, as we break through our target, we will start to see companies actually initially trying to produce as much as they can because they start to face some cash flow problems," says Darby. "But, we think that around about this level, over the next 12 to 18 months, companies will be forced to cut back on production as, unfortunately, their cash costs start to turn negative."
So where does Darby think investments will do particularly well? Watch the video above to see the rest of his interview with Talking Numbers to find out.
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