GOLD PRICE NEWS – The gold price dropped $9.40 to $1,386.80 per ounce Wednesday, plunging despite this morning’s tepid price inflation data. The price of gold fell decisively under $1,400 per ounce after the November Consumer Price Index showed a scant 0.1% rise versus expectations of 0.2%. Weighing on the gold price, as well as the broader stock and commodity markets, was rising risk aversion among investors.
News that Moody’s placed Spain’s debt rating on watch for a possible downgrade led to weaker stock prices in Europe. With the euro zone nation in need of $225 billion next year, the ratings agency is concerned that Spain’s refinancing needs make it “susceptible to further episodes of funding stress.” The U.S. dollar gained versus the euro, helping to pressure the gold price. Cyclical commodities were among the largest decliners with oil and copper falling 1% and 1.7%, respectively.
While the gold price posted modest gains Tuesday, most commodities finished lower as strength in the U.S. dollar on the back of higher Treasury yields led to selling pressure. The recent rise in Treasury yields has weighed on the gold price and its sister precious metal, silver, which fell 2.5% to $29.05 per ounce early today.
Gold and silver companies moved lower heading into the open on Wall Street. Notable decliners in the sector included Agnico-Eagle Mines (AEM), Newmont Mining (NEM), and Silver Standard Resources (SSRI). Shares of AEM, NEM, and SSRI retreated 0.5%, 0.8%, and 0.5%, respectively, in pre-market activity.
Yesterday’s Federal Open Market Committee (FOMC) meeting yielded virtually no change in both the level of interest rates and the accompanying policy statement. Chairman Bernanke has been very transparent since announcing the Fed’s $600 billion quantitative easing (QE2) initiative last month. After rising 23.5% off its late-July low to an all-time high of $1,431 per ounce – largely in response to the Fed’s money printing campaign – the gold price has been consolidating near the $1,400 level for most of the past two months.
The FOMC chose to maintain near-zero interest rates and continue to implement its QE2 program. The Committee’s statement noted that although the economy is continuing to recover, it is not doing so at a pace sufficient to lower the unemployment rate. Furthermore, “investment in nonresidential structures continues to be weak,” and “the housing sector continues to be depressed.”
The statement went on to discuss the ongoing “subdued” levels of inflation and inflationary expectations, which are expected to necessitate “exceptionally low levels for the federal funds rate for an extended period.” Once again, Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, was the only FOMC member to dissent, as he contended that “a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”
While the Fed did not go so far as to expand the size of QE2, its decision to maintain the significant size of its asset-purchase program and to reiterate its dovish outlook is a positive development for the gold price. “Helicopter” Ben Bernanke continues to flood the system with cheap money, and investors have responded by continuing to seek protection in gold and investments tied to the price of gold. Until the Fed begins to view inflation, rather than deflation, as the primary threat facing the economy, the fundamental outlook for the gold price will remain decidedly bullish.
