Gold prices tanked Thursday afternoon as comments by Federal Reserve Chairman Ben Bernanke seemed to throw cold water on the idea of additional stimulus to help a struggling U.S. economy.
Prices rebounded some in overnight trading yestreday but gold was still down $11.27 in the morning to $1,580.41. Silver was down $0.29 to $28.39, bringing the silver/gold ratio to 55.6.
It’s hard to separate all the factors influencing gold prices. The comments by the Fed chairman hit hard Thursday afternoon, with gold prices briefly dipping below $1,560 an ounce before starting a slow but steady recovery.
Adding to the price confusion, the dollar gained big against the euro which knocked nearly 3 percent off the price of crude oil and sent platinum, palladium, and copper tumbling as well.
Overseas stock markets tanked on the news, landing particularly hard on Asian markets, with the Nikkei losing over 2 percent of its value.
Yesterday I warned that if the Federal Reserve came out forcefully against additional easing that gold prices would drop and that’s exactly what happened. The initial panic in gold selling was tempered by investors considering all the factors on the side of additional easing and wondering if this is really the last word on QE3.
The prospect of a continuing strong dollar triggered a global flight to cash in the form of dollars as investors in other countries hitch a free ride on the big shoulders of U.S. currency. Making the U.S. dollar a bright and shining light has a certain nostalgic appeal, but if the Fed lets it go on too long a strong dollar will force unemployment higher. With educated, industrialized countries like Spain, Italy and Ireland fighting unemployment in the range of 18 to 25 percent, do we really want to give them a leg up on manufacturing jobs by letting the dollar live large against the euro?
As currency policy relates to gold prices, Europe will almost certainly need to pull billions of euros out of a hat to rescue Spanish banks. With the amount of funds the European Central Bank has already committed to bailing out Greece, I don’t see how they can do it short of printing huge quantities of euros.
It’s hard to see how the Fed could not answer that challenge at a time the U.S. is desperate to hang on to the few manufacturing jobs we’ve managed to develop. If you also believe the Fed will be forced to act, then now is the time to be buying gold.