Fool's Gold Report: Yellen Sends Gold Plunging With Hawkish Comment; Miners Hit Hardest

The Fed's suggestion that rate increases could start as soon as six months after Fed tapering ends send shockwaves through markets, and gold reacted negatively. Are investors overreacting?

Mar 19, 2014 at 7:06PM
Longview

Wednesday proved to be an exciting day in the gold market, as initial declines on continuing stability in the Ukrainian situation and in the Chinese economy widened even further after Fed Chair Janet Yellen's comments at her post-FOMC meeting news conference. One key answer suggested to many market participants that the Fed could start raising short-term interest rates within six months after the end of quantitative easing, and that led to high anxiety in the precious-metals markets. April gold futures settled down almost $18 per ounce to settle just above $1,341, while May silver dropped $0.04 per ounce to $20.83. Yet because of the timing of futures settlements, spot prices continued to drop further after that, with SPDR Gold Shares (NYSEMKT:GLD) losing nearly 2%, iShares Silver (NYSEMKT:SLV) falling 1%, and the Market Vectors Gold Miners ETF (NYSEMKT:GDX) suffering a nearly 4% drop on the day.

Metal

Today's Spot Price and Change From Previous Day

Gold

$1,331, down $25

Silver

$20.61, down $0.20

Platinum

$1,440, down $12

Palladium

$760, down $5

Source: Kitco. As of 5:30 p.m. EDT.

Gold And Silver

Image sources: Wikimedia Commons; Creative Commons/Armin Kubelbeck.

The Fed brouhaha erupts
What was originally seen as being a relatively predictable Fed meeting turned out to be a huge market mover, sending the Dow down 200 points at one point, with bond yields rising precipitously and with the resulting carnage in gold. Most of the controversy centered on Yellen's answer to a news-conference question concerning exactly what she saw as the "extended period" that the policy statement has referred to as the time horizon during which investors should expect easy monetary policy to continue. Somewhat unexpectedly, Yellen gave a relatively direct answer to that question, suggesting that six months would be an appropriate time. That clearly surprised investors as being much more hawkish than expected, sending markets lower.

The issue with the "extended period" language is that past indications have suggested it could be much longer than six months. For instance, as Yellen herself pointed out in a speech last year, the Fed in August 2011 substituted the language "at least through mid-2013" for what had been "an extended period" in previous policy statements. Many took that substitution as a clarification of the "extended period" language rather than as an indication of a timeframe, setting expectations as long as two years. In that context, the much-shorter six-month period was shocking, leaving investors with far less time to unwind trades based on low interest rates -- including those involving gold.

As hard as bullion prices were hit, mining stocks fell even more dramatically despite some solid fundamental news. Barrick Gold (NYSE:ABX) led the major gold miners down with a 4% decline, but losses were nearly as bad at its largest peers. Inherent in those losses was the recognition that the Fed has the power to shift not just short-term trading trends but also longer-lasting market conditions that gold miners must face, and that could bode ill for the recovery in gold prices so far this year. That could weigh on prices even as many gold miners have reported encouraging production gains that could open the door to much larger profits if gold prices recover.

It'll be interesting to see if the Fed clarifies Yellen's comments at some later date, giving itself more wiggle room to leave rates low for a longer period. If that happens, then gold could recover at least some of its losses from today and heal some of the damage Yellen's statement wrought on the gold market.

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