Where Next For Gold?

Michael Teague  |

In September of 2011, gold hit a record-high of $1,923.70, the apogee of over a decade during which the price of the precious metal increased over 500 percent. While 2013 has been a particularly good year for equities, however, gold has gone the opposite direction to its current $1,2810.

This state of affairs for the yellow metal has been variously blamed on the Fed’s accommodative monetary policy that has investors thinking equities might be a far less risky place to put money, or on the Cypriot-EU bank bailout crisis that sparked fears about troubled Eurozone banks selling-off gold reserves to raise cash for bailouts.

The situation was further compounded by Fed Chairman Ben Bernanke’s press conference of last month, during which he suggested that the dreaded process of “tapering” could begin as soon as this fall, sending bond yields up in anticipation of hike in interest rates, and putting heavy downward pressure on all asset classes.

The damage control done by representatives of the Fed since Bernanke floated the first trial balloon regarding the end of Quantitative Easing was topped off last Thursday by another press conference from the Chairman, during which he reasserted the need for “highly accommodative monetary policy for the foreseeable future.”

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The market reaction to the more dovish guidance coming out of the Fed could be seen last week with gold futures rising 5.4 percent on the Comex, the biggest jump for the metal since October of 2011. Along with Monday’s gains, to its current $1,281.40, gold has recuperated most of what it had lost, at least since Bernanke’s June 19 press conference.

While Goldman Sachs ($GS) and Credit Suisse Group (CS) are still holding to their bearish predictions on gold, there are some bullish forecasts that are beginning to emerge after the metal’s incredibly rough year. Both Standard Chartered Plc and Deutsche Bank AG have said that the worst of the sell-off could be over, with the former predicting $1,400 by the end of the year.

All the same, ETFs such as the SPDR Gold Shares ($GLD) that are tied to the price of gold have seen an outflow of almost $60 billion so far in 2013, and with the prospect of both higher interest rates and stagnant inflation looming on the not-so-distant horizon, it might yet be too early to say whether or how much of the optimism surrounding bullion’s rally of the past week is actually realistic.


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