Federal Reserve Finally Gives Gold a Boost

After being a big part of the problem for gold, the U.S. Federal Reserve and its chairman, Ben Bernanke, are finally becoming a part of the solution. On Wednesday, Bernanke made clear that the growing concern in the precious metals markets that quantitative easing would begin to taper off were unfounded. Combined with positive comments from miners, including Newmont Mining (NYSE: NEM  ) and Gold Fields (NYSE: GFI  ) , the result was a major surge for gold during Thursday's trading session. Making the move all the more interesting is the fact that the miners are outperforming the commodity, an unusual occurrence over the course of this year.

The Fed
On July 10, the Fed minutes were released showing the intense divide which still remains among the central bank's senior officials: "Others were concerned that stating an intention to slow the pace of asset purchases, even if the intention were conditional on the economy developing about in line with the Committee's expectations, might be misinterpreted as signaling an end to the addition of policy accommodation or even be seen as the initial step toward exit from the Committee's highly accommodative policy stance."

This signal has been the exact message received from the gold and silver markets, which have been down sharply since comments about a slowing of QE surfaced. In the past three months, the SPDR Gold Trust (NYSEMKT: GLD  ) is down roughly 18% and the iShares Silver Trust (NYSEMKT: SLV  ) is down roughly 28%. The GLD started Thursday up nearly 2.5%, while the more volatile SLV was up over 4%.

GLD Chart

GLD data by YCharts

Adding to the strength of the Fed's backpedaling were Bernanke's comments to the National Bureau of Economic Research: "A highly accommodative monetary policy for the foreseeable future is what is needed for the U.S. economy." This sent a strong signal that the Fed chair is maintaining a supportive stance toward interest rates and that no change is likely until sustained economic recovery is secured.

The gold miners
In addition to the positive news from the Fed, various miners delivered positive news to the precious metals sector. Newmont, for example, released numbers for second-quarter production results that were in line with expectations. Similarly, Gold Fields made positive comments about its production for the rest of the year: "Despite the 5% decline in production from Q1 2013 to Q2 2013, Gold Fields remains on track to achieve its production guidance for 2013 of between 1,825,000 and 1,900,000 ounces and cash cost and NCE of US$860/oz and US$1,360/oz respectively."

Ultimately, the gold market took the news from both the Fed and the miners as a positive and drove prices – thus far at the time of this writing – to their largest advance of the year. It remains to be seen if the bounce signals a new sustainable uptrend in gold prices, but it is a great first step toward, at least, stemming the losses, which have been significant this year. Gold should continue to be considered a speculative play, as the unknowns remain more plentiful than the knowns, but reassurance that the Fed is not about to hike rates is positive.

The effect of this news from the Fed is that it takes away some of the perceived attractiveness of dollar-denominated assets, which gain in appeal if rates rise. Whether this will prove to be a respite for gold or a reversal remains to be seen, but careful attention to Fed action is warranted. The good news for investors is that the miners may be firming, meaning that there are alternate investment vehicles to consider.

If you want to look beyond the recent bounce back in the precious metals markets, something to consider is the fact that with the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

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  • Report this Comment On July 11, 2013, at 9:56 PM, grahamsway wrote:

    I'm sorry to say it as I'm still long some gold miners (not as much as I used to be due to bailing out on some and lower mkt cap on the remaining) but I'm guessing this might be a head fake if the jump was Fed based.

    As far as I saw & heard, any meaningful QE is still ending by summer 2014. The Fed will continue keeping interest rates low and keeping up their psychological support but they are clearly scared of going too far with their purchases, which probably should terrify them.

    I'm not sure what's going to happen with gold but if the rise today was due to expectations of lower rates or maintained QE, I think buyers might be disappointed.

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