Gold Suffers as Fed Spooks Financial Markets

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, has the following comments on the current gold market situation and outlook:

Equity, debt and precious metals markets all reacted sharply to last week’s warning from Federal Reserve Chairman Ben Bernanke that the central bank could begin tapering off the central bank’s monthly bond purchases later this year if economic conditions continue to improve.

But that’s a big “if.”

Chairman Bernanke said the Fed intends to scale back its monthly purchases of Treasury and mortgage-backed bonds later this year and to end them altogether when the unemployment rate falls to 7 percent, which the Fed predicts by mid-2014.

But Fed expectations are often unrealized. To be blunt, its track record at forecasting the economy has been dismal - and its predictions of economic growth made early this year have already proven overly optimistic.

My feeling is that the economy remains vulnerable and economic conditions will disappoint the rosy scenarists at the Fed (and elsewhere) in the months ahead.

This is even truer as a result of the Fed’s latest policy statement given the rise in medium- and long-term interest rates, the fall in equity markets, and the resurgent dollar exchange rate vis-à-vis America’s trading partners - all of which will restrain rather than promote economic growth.

Employment markets remain especially vulnerable, where the Fed’s target for the headline unemployment rate is still far away and other measures (such as hours worked, average wages, the number of part-timers wanting full-time employment, and the number of discouraged job seekers dropping out of the workforce) paint an even worse picture.

The housing sector – one of the economy’s current hot spots where hiring has been on the up and up, is extremely interest-rate sensitive and could soon succumb to higher mortgage interest rates.

A reassessment of economic prospects in the months ahead should be supportive of precious-metals prices in this year’s second half.

In the meantime, gold remains vulnerable to further setbacks given the technical and psychological damage inflicted by this latest sharp decline in the yellow metal’s price.

In the days ahead, much depends on the price-responsiveness of physical demand, particularly in the large Asian markets. Earlier this year, demand for jewelry, coins, and investment bars surged as private-sector buyers as well as central bankers dramatically stepped up their purchases at prices under $1400 an ounce - and, even more so, whenever prices dipped below the mid-$1300 range.

The question now is will these price-sensitive buyers rush in as they have in the past or will they wait a bit for prices to stabilize, possibly at lower levels, before stepping up their gold purchases.

Many gold investors, including clients of Rosland Capital, know I’ve been bullish on gold-price prospects for many years – and I remain so at least for the long term. I remain confident that we will see gold trading at new all-time highs sometime in the next five years. For investors with a very long-term perspective – as well as for those buying gold as a portfolio diversifier and financial insurance policy – current prices will prove to be a bargain.

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver coins, platinum, palladium, and other precious metals. Rosland also helps people who wish to protect their wealth by including a gold or precious metal-backed IRA in their asset portfolio. Click here for more information.

About Jeffrey Nichols

Jeffrey Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital, has been a leading precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.