GOLD PRICE NEWS - The gold price is hovering just under $1,200, trading at $1,194 per ounce ahead of the eagerly anticipated testimony from Fed Chairman Ben Bernanke on the state of the economy. The broader markets, in tandem with the gold price, have been in correction mode in recent months amid worries over a double-dip recession and a more severe debt deflation scenario. The gold price is off 5.8% over the past month while the S&P 500 has dropped 11.1% from its 2010 high.
The SPDR Gold Trust (GLD), which acts as a proxy for the gold price, has been under pressure lately as a generalized liquidation of assets has taken place. This deleveraging has negatively impacted the gold producers and explorers, which have corrected alongside the gold price and broader market equities. Newmont Mining (NEM), the only gold miner in the S&P 500, has declined 6.9% in just the past eight trading days.
Wednesday afternoon Fed Chairman Bernanke heads to Capitol Hill for his semi-annual testimony to Congress on the state of the economy - formerly known as the Humphrey-Hawkins testimony. The big question on the minds of investors is whether the U.S. economy is in the midst of a mid-cycle slowdown or the more dreaded double-dip recession scenario is materializing. The recent sell-off in stocks, commodities, and the gold price has reinvigorated deflation fears.
In February, Bernanke told Congress the U.S. was in the midst of a “nascent economic recovery” and that consumer spending was “picking up.” It is unlikely that this generally optimistic tone will be repeated given the recent drop in consumer confidence, the downturn in housing data, and the disappointing labor market figures. The gold price accelerated to the upside when it was obvious that the Fed, and other global central banks, were prepared to engage in a wide range of policy tools in order to prevent a dangerous debt deflation form taking hold.
In recent months, Fed officials have made it clear that the central bank has no plans to deploy additional tools to accelerate the recovery. Asset prices, including the gold price, have wilted lately - partially due to concerns that without support from policymakers, the double-dip recession outcome is more likely.
What the past couple of years have demonstrated is that government is prepared to do whatever it takes to plug the vacuum in private demand. If the recent downturn accelerates, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., the Fed may initiate “additional asset purchases.” The ballooning of the Fed’s balance sheet due to its quantitative easing program, which began in March of 2009, has helped drive the gold price to an all-time high of $1,265 per ounce. The gold price has rallied 35% from the fated day of March 18 when the Fed announced it would print money to buy a wide range of assets in order to stimulate the economy.
Should the economy accelerate to the downside and stock and commodity markets drop significantly, it appears to be a foregone conclusion that Bernanke and the Fed will initiate quantitative easing 2.0. If history is a guide, look for the gold price to break out to the upside when that day comes.
