Gold Thrown Overboard

Includes: ABX, GG
by: Market Blog

By David Berman

That loud sound you heard on Wednesday was gold hitting its biggest one-day setback this year. Gold fell to $1,718 (U.S.) an ounce on Wednesday afternoon, down a noteworthy $71. That, of course, is but a pinprick next to the big gains of recent times, with gold outperforming every other asset class over the past five years.

Still, it's enough of a drop to make one check some of the assumptions that have been driving the price higher. Some investors believe that gold is a good haven investment during inflationary periods or when the value of paper money is being eroded by hyperactive central-bank printing presses. On Wednesday, it looked as though paper money was doing just fine, with the U.S. Federal Reserve apparently in no rush to stimulate the U.S. economy.

The Fed has resorted twice to a stimulative effort known as quantitative easing, which involves printing money to buy U.S. government bonds. With the U.S. economic recovery not yet in the clear, some observers had thought that the Fed would initiate a third round some time this year, despite some encouraging signs in the U.S. employment situation.

However, Fed chairman Ben Bernanke made it sound as though this QE3, as it's called, might not be in the works. In his testimony before Congress, Mr. Bernanke said that low interest rates were needed despite improvements in the labor market, but gave no signal that the central bank was considering alternative forms of stimulus.

The testimony occurred soon after it was reported that the U.S. economy expanded by 3 per cent in the fourth quarter, at an annualized pace, which is above the 2.8 per cent expansion estimated previously.

The gold market took the news badly, and gold producers followed bullion lower - hitting the commodity-heavy S&P/TSX composite index particularly hard. The TSX was down about 100 points or 0.8 per cent in early afternoon trading. Among large gold producers, Barrick Gold Corp. (NYSE:ABX) fell 3.3 per cent and Goldcorp Inc. (NYSE:GG) fell 3.5 per cent.

Disclosure: None.