Taper? Gold Bugs Will Find A New Armageddon

For gold investors, the Federal Reserve’s decision Wednesday to taper its $85 billion-a-month bond buying program was a particular blow. That Fed program was the gold market’s best hope for a recovery in gold prices, on the theory that it would eventually create the sort of inflation that makes gold attractive. With a taper underway, the year’s losses nearing 30% and little inflation in sight, where’s a gold bug to look for inspiration now?

UK Gold Price Chart

UK Gold Price data by YCharts

Hardcore gold backers still like to watch a couple of charts. High government debt, they contend, is a sign of high inflation in the future with or without a Fed bond-buying program. They expect inflation to rise as the government essentially prints money to cover seemingly intractable debt.

US Government Debt Chart

US Government Debt data by YCharts

Some contend that a steep rise in inflation, even if not to historically high levels, would be enough to ramp gold prices. So they’ll watch the core inflation rate for signs of steady gains.

US Core Inflation Rate Chart

US Core Inflation Rate data by YCharts

(As YCharts noted in a post earlier this month, the easy-money policies of the Fed most certainly contribute to inflation of investments, such as stocks and housing. But of every day goods and services as measured by the Consumer Price Index? There don’t appear to be shortages or other factors that would send prices up significantly. An increasingly global economy makes the inflation picture far different than in the late 1970s, when prices soared. Fears of a return to that sort of price inflation, or of wage inflation, fail to take into account how fundamentally the economy has changed.)

The taper is yet more bad news for gold mining stocks like Barick Gold (ABX), Newmont Mining (NEM) Goldcorp (GG) and Kinross God (KGS). But the market's we're-cool-with-that reaction to the taper is good news for companies that operate with wide and deep exposure to the global economy, such as General Electric (GE), Boeing (BA), 3M (MMM), JPMorgan (JPM) and Citigroup (C).

Many investors, including billionaire John Paulson, continue to hold gold because they see inflation as inevitable long term and gold as its best hedge. If their inflation expectations pan out, the value of the dollar likely would weaken. Because gold demand tends to rise when the dollar falls, gold prices could ramp up quickly in that scenario.

Real Trade Weighted US Dollar Index: Major Currencies Chart

Real Trade Weighted US Dollar Index: Major Currencies data by YCharts

Still, you don’t hear a lot of high-level investors recommending gold now. Improving economic conditions have made stocks more attractive investments. Small steps toward real governing – Congress’ passage of a budget, for example – make investors less worried about economy-crashing crises that would make gold the better investment. The low level of inflation fear that a lot of ordinary investors carried pretty much died with Ben Bernanke’s announcement Wednesday.

Market analysts surveyed weekly by Bloomberg have been consistently bearish on gold in the past few months, and 2014 forecasts are bleak. Even Paulson sold half his gold earlier this year and resisted the temptation to buy more last quarter. UBS (UBS) predicts an average price of $1,200 for the year, which is a tad below where it opened on Thursday. Goldman Sachs (GS) says sell it. For many, there’s just no way to read great news for gold in those charts.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Economic Watch  gold   federal reserve   inflation   monetary policy   

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