Has the Federal Reserve Slaughtered the Gold Bulls?

Since its precipitous fall in mid-April, the SPDR Gold Trust (NYSEMKT: GLD  ) has been largely range-bound ever since, both struggling to recover and testing previous lows repeatedly. Gold, the ETF's underlying commodity, has been under pressure from a number of forces, but the recent impact of apparent strength in the U.S. economy may be the most severe. Spearheading the onslaught on gold has been the U.S. Federal Reserve and Chairman Ben Bernanke. In comments earlier this week, Bernanke indicated that the Fed may slow the pace of bond buying that has been the centerpiece of the central bank's policy of quantitative easing. When coupled with remarks from various member of the Federal Open Market Committee, the gold bulls may be in trouble.

Fed-speak
The Fed minutes, particularly when taken in combination with remarks Bernanke made to Congress, paint a mixed view of the way forward. There are members of the FOMC who clearly want to see a reduction in quantitative easing, if not an all-out halt. This stance is largely a reaction to improving conditions in the labor market and the sense that the economy is improving -- the U.S. Commerce Department said that orders for durable goods rose by 3.3%, more than the 1.5% that had been expected.

On the other side of the argument is the warning that Bernanke issued to Congress on the dangers of ending QE too soon. The Fed chairman suggested that a premature reduction in bond buying could slow or reverse the recovery that he believes the policy has fueled. The ultimate message was pure Fed-speak -- despite Bernanke's stated wish for transparency -- in that the Fed might pare back QE, but maybe it won't.

What does it mean?
One very real concern surrounding the end of QE is the impact it will have on the stock market. There is a pervasive belief that the current rally is Fed-created and that an end in easy-money policies will create a vacuum that will punish stocks severely. Whether or not this is completely true -- and I believe it is -- the degree to which it is an accepted reality means it will probably happen. The role of the Fed in the equity markets have become something of a self-fulfilling prophecy. The challenge for the Fed is to find a way to turn off the cash spigot without cratering the market.

For the gold bulls, the evidence is not great on multiple fronts. A strengthening U.S. economy has led to a strengthening U.S. dollar. A strong dollar is generally bearish for gold, and that has been the case here as well. Furthermore, much of the gold rally since QE began was driven by investors looking for a shield from inflation. That inflation hasn't shown up, and if QE disappears without an appearance, gold is likely to be badly punished.

Supporting this last argument is that the iShares Silver Trust (NYSEMKT: SLV  ) has suffered roughly the same fate. Silver is generally considered more industrially important, but the precious-metal element of silver has pushed it down even more than gold this year. Similarly, most of the major miners have been hurt as well. Goldcorp (NYSE: GG  ) is down even more than the commodity, despite reiterating full-year guidance at its last earnings call. The company saw both revenue and earnings decline, largely because of receiving a lower price per ounce than it had a year earlier.

Ultimately, the gold bulls look like they have some real challenges ahead. From a trading perspective, the next breakout will be important. If gold can trade above $1,400, the long-term trend may be protected. If, however, gold slumps below $1,300, more bulls will be on their way to the slaughterhouse.

Despite the obvious concerns, Goldcorp is one of the leading players in the gold mining market. For the last several years, investors have been the beneficiaries of several successful acquisitions and strong organic growth. Goldcorp's low-cost production of one of the most sought-after metals in the world continues to make this stock an attractive choice for long-term investors. To learn everything you need to know about this mining specialist, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of ongoing updates and analysis to keep you informed as key news breaks. Click here now to claim your copy today.


Read/Post Comments (4) | Recommend This Article (3)

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  • Report this Comment On May 25, 2013, at 5:21 PM, Rastenborg wrote:

    Do the buyers fear the lower prices or the Obama administration putting them on the terrorist watch list for buying gold? We all know the present recession is one of the government putting those old white folks and veterans earned benefits into the stock market. Does that mean the government inflation stats were false? No falser than the pups and grocery prices or a pair of Wal Mart shoes. The news is the economy is getting better and it will rain gumdrops and cake. Just remember, buy all the pawn shop gold like Bernanke does and it will never show.

  • Report this Comment On May 25, 2013, at 8:18 PM, tfirst wrote:

    Furthermore, much of the gold rally since QE began was driven by investors looking for a shield from inflation. That inflation hasn't shown up, and if QE disappears without an appearance, gold is likely to be badly punished.....This statement alone discredits the whole article..Inflation hasn't shown up? Everything has gone up in price, and all the newly printed currency for the bailouts is just beginning to enter the mainstream circulation. I do know that when QE infinity ends interest rates will shoot up and maybe the seniors can recoup some of the value stolen from them by the FED.

  • Report this Comment On May 25, 2013, at 8:41 PM, mnglang wrote:

    Well, quite opposite to what the article says, it appears that the QE has been killing gold in past months and the end of QE may be a wonderful news for gold holders. The paper gold (ETF) is selling off, but the real gold is bought up crazily in the emerging market, where inflation is rocket-high and people have to buy gold and other real valuables for wealth protection. Don't only focus on US where people possess wooden houses and only know paper gold. Once a wooden house is burned and all the paper gold will be gone, but your real gold will still shine in the ashes.

  • Report this Comment On May 25, 2013, at 8:58 PM, gkirkmf wrote:

    Buy all the Krugerrand 1 oz coins you can at $1300 an oz...... unfortunately, I have not been able to find them.... hummm... GLD at 1320 an oz. but Krugerrand 1 oz coins at 1490 each.... quite a spread I would say.... can't have anything to do with the shorting Goldman Sachs has been up to lately can it? Or the dumping that has occurred on the spot market over the past 2 months. The giant blood sucking squid is on the move... I personally am hoping that a large whale has it's eye on it.

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