The Daily Nugget: Bernanke Takes Gold Down With The Word "Moderate"

Yesterday the word ‘may’ became the most powerful word in the gold and silver market. As Bernanke announced that the Fed may look to ‘moderate’ bond purchases towards the end of the year the price of gold and silver both fell to a one-month low.

This morning the spot gold price has gone below $1,300, it remains under pressure amongst a seemingly global bearish sentiment. This morning gold futures were down 4% – as low as January 2011 – as a result of Bernanke’s comments.

Yesterday holdings in the gold-backed SPDR trust fell to below 1,000 tonnes for the first time in four years. According to Bloomberg holdings in global gold backed ETPs fell 517.4 tons to 2,114.6 tons, the lowest since March 2011. The visibility of ETF outflows has a proportionately greater effect on market sentiment than other gold products thanks to their visibility, we still continue to see high levels of people looking to buy gold.

The Federal Reserve raised growth forecasts for 2014 and sees unemployment falling to between 6.5% and 6.8% by the end of the year. The FOMC have said they are looking to end the easing programme all together by mid-next year. The hawkish balance of Bernanke’s comments will prove to be bearish for gold in the short-term.

Gold bears continue to remind those of us in gold investment that inflation is at a 53 year low and easing is coming to an end, therefore we’re in the wrong game. Societe Generale – whose analyst Michael Haigh correctly predicted April’s rout – believe that there is worse to come for the yellow-metal and predict a fourth-quarter average of $1,200.

According to Haigh’s formula investors ‘are just dumping gold,’ and are no longer looking at ‘bigger outside factors’. This is different to 3 months earlier when he found investors were feeling more bullish about the global economy. His recent findings suggest that ‘investors’ are in for a bit of a shock.

The tumble, not only in gold and silver but also in shares, bonds and other commodities, shows how desperate and reliant markets have become on central banks’ ‘free’ money. It also shows that the latest fear buzzword is ‘taper’, we’ve had ‘fiscal cliff’ and now it is ‘tapering’. So far markets have only seen the positive effects of the FOMC’s policies, and they are likely to as long as the pumping carries on. However, the negative impact of inflating the money supply is in place and the sooner tapering begins the sooner these are likely to show up.

The preliminary release of China’s manufacturing purchasing manufacturer’s index fell to a nine-month low this month, from 49.2 in May to 48.3. The feared slowdown in manufacturing appears to be coming to fruition. Markets may well start looking to China’s central bank to see if any QE or lowering of interest rates is in the pipeline.

Dr. Doom is still buying gold

When asked what would happen should central banks begin to taper money printing or if they lost control of bond markets, Marc Faber, ‘Dr. Doom’ , stated that it could only be negative for equity markets. As the flow of money turns to a trickle equity markets, currently on an upward run, will see the reverse.

Faber believes that the environment at present is not favourable to making money, but he’s still looking to gold stocks and physical gold. According to him, ‘the commodity which is most hated ‘at the present time is gold and silver…there are numerous [analysts] who have never owned gold and now they are predicting gold to drop another 30% or so. Now, that may happen, but not because of the predictions of those people. If gold tumbles further it would highlight a significant tightening of global liquidity which would then also be negative for emerging market currencies, emerging stock markets and also US stock market.’

He is also concerned about events such as those in Brazil, ‘we are in the midst of a currency war, countries believe that through currency devaluations they can help their economies but I would suggest emerging economies are particularly vulnerable.’

Dr. Faber is a famous contrarian investor and is a highly respected individual known for calling major market moves.