With Taper, the Fed Takes Gold Back 3.5 Years

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

During the past six months, the Fed surprised the market several times with regard to the "taper" -- most notably, perhaps, in September, when it failed to pull the trigger -- resulting in bouts of volatility. However, investors were obviously prepared for yesterday's decision by the central bank to begin scaling back its monthly bond-buying program. That's what the price action indicates, in any case, with stocks essentially unchanged today, as the S&P 500 fell less than 0.1%, while the Dow Jones Industrial Average (DJINDICES: ^DJI  ) rose less than 0.1%.

That's not the case for all risk assets, however -- just take a look at gold, which fell 2.8%, to $1,196 per ounce, its lowest closing value since June. The most popular gold vehicle, the SPDR Gold Shares (NYSEMKT: GLD  ) , has now lost 29% of its value year to date. (Not coincidentally, the iShares Silver Trust (NYSEMKT: SLV  ) lost 3.1% today and is down 37% on the year.) This year, the yellow metal will suffer its first losing year since 2000, highlighting the shift in investor sentiment that has occurred since 2012.

Indeed, prior to June, you need to go back to Aug. 2010 to find lower gold closing prices. The world looked quite different back then, with the eurozone crisis only beginning to unfold. Greece was only on its first bailout package, and none of the other PIIGS (Portugal, Ireland, Italy, Greece, and Spain) had requested one yet. The U.S. still had its shiny triple-A credit rating; it would be another year before irresponsible politicians would push the country to the brink of a technical default. At the time, investors couldn't hide from the specter of macroeconomic risk; the environment was worsening, with sentiment along with it.

Fast forward nearly three-and-half years, and that momentum has reversed. The eurozone crisis has simmered down, and the Fed's decision to taper, however gingerly, acknowledges that the U.S. economic recovery has found some ground. Furthermore, the inflation boogeyman never materialized; in fact, the greater concern today is that inflation remains too low.

The fact that gold closed below the $1,200 level today is also significant. In general, I don't attach very much weight to the psychological importance of round numbers, but with gold, which offers no yield, price and psychology are everything. Still, some well-informed observers think the correction in gold prices has largely run its course. After the Fed's decision, Jeffery Currie, Goldman Sachs' head of commodities research told Bloomberg:

Gold is now likely to grind lower throughout 2014. Much of the expected price decline has been priced in as opposed to a more gentle process as the Fed backs away from QE. When the gold market sees these events, it usually tries to price it in immediately.

I think that's certainly conceivable, perhaps even probable. However, I wouldn't rule out gold breaking below $1,000 in 2014, which would take us back to Sep. 2009 prices. After all, the world arguably looked a lot scarier at that time than it does now.

The gold trade is broken, but here's one stock for 2014 that could make you rich
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2772214, ~/Articles/ArticleHandler.aspx, 4/20/2014 12:48:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement