Gold Price Drops, but Future Still Shining

This week we saw gold drop from the $1,270 per ounce range to the $1,250 per ounce range. While the price of gold has declined, there are two lights shining at the end of the tunnel for value investors looking to pick up the yellow metal.

Economic Data and the Federal Reserve

Data showed that the US jobless claims dropped and that retail sales are on an upward swing. This positive sway for the economy is just one more indicator that the Federal Reserve may start tapering sooner rather than later. The Fed’s ultra-loose economic policy of buying $85 billion a month in bonds and mortgage-back securities is an effort to hold down long-term interest rates and stimulate job growth. The biggest contingency in slowing down this buying program hangs upon improved economic data. Now that this has become more of a reality, policy makers are much more willing to move forward with tapering. Gold is seen as a safe haven against economic distress. Therefore, when reports of positive data make headlines as they did on Wednesday, gold tends to move lower. It’s hard to know exactly when tapering will take place, but it will definitely be a pivotal moment for gold.

Two Positive Points Looking Forward

Jim Sinclair – a precious metals and currencies commentator believes gold will move upward by the end of the year. “At the year-end we’ll be having a recovery from the 1,100 [dollars per ounce] area towards 1,500. Let’s call it 1,425.” He continued to say that gold should be more of a safe haven bet after tapering occurs. Indicators are showing that Janet Yellen is likely the next Federal Reserve chair. She is known to err on the side of extending monetary policies too long rather than cutting it off too quickly. Fox Business News stated, “She would press forward with the bank’s ultra-easy monetary policy until officials were confident a durable economic recovery was in place that could sustain job creation.” For now Ben Bernanke is in charge and the decision to taper may come as early as December. If this doesn’t happen by then and Yellen takes over, the Fed may have to add on a few more months of the current monetary policy due to her propensity of taking things slow.

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Resources: Reuters, FoxBusiness