Gold Loses Lustre After Fed Caution on QE

June 8, 2012 at 06:53


Gold tumbled on Thursday and into Friday after Ben Bernanke, US Federal Reserve chairman, failed to give the nod to further quantitative easing.

The sudden and extreme move highlighted the extent to which the metal’s fortunes have become linked to the outlook for further money printing by the world’s central banks.

Last Friday, gold had its strongest daily jump in more than three years after weak US jobs data led investors to hope for a new round of QE.

Following dovish comments from other members of the Fed monetary policy committee, many investors had hoped Mr Bernanke would give markets a signal the central bank planned a new round of QE.

But when he merely said the Fed would be “prepared to take action as needed”, gold dropped nearly $40 an ounce in little over an hour, touching a low of $1,577.90 a troy ounce.

Mr Bernanke’s caution on further action followed a similar stance by the European Central Bank and the Bank of England, both of which were expected by some analysts and investors to move more aggressively to restore growth.

“The story that the gold market was hoping for – coordinated central bank easing from the ECB, Bank of England and Fed – just hasn’t happened,” said Matthew Turner, precious metals strategist at Mitsubishi, the Japanese trading house.

The gold market has been subdued in recent months, despite growing fears of a eurozone break-up. Investors have stepped back, preferring to seek safety in US government bonds than precious metals.

At the same time the physical market has been weak as demand from India, traditionally the world’s largest gold consumer, has been muted thanks to the weakness of the rupee and sluggish domestic growth.

Nonetheless, many investors and traders expect gold to regain its lustre as the eurozone crisis remains unresolved.

Tom Kendall, precious metals strategist at Credit Suisse, said the recent rally had reawakened investors’ interest in gold.

However, he added: “A period of consolidation is now probable until we get closer to the Greek elections on 17 June.”