Written by Nathan White, Chief Investment Officer, Paragon Wealth Management
The price of gold fell over $90 today to close just below $1700/ounce. That would be the same as the Dow falling 650 points! Moves like this highlight my view of the risk inherent in owning gold at these prices. The fall was due to comments by Fed Chairman Bernanke before Congress today where he indicated that QE3 will probably not be needed. Initially many thought that the downward move was just a kneejerk reaction but then it continued down. What I find interesting is that many gold bugs (i.e., people who love gold) tend to despise the Federal Reserve and its actions or existence and buy gold to protect themselves. However, after they have bought gold they then have a vested interest in the Fed continuing the actions that they fundamentally disagree with! Talk about irony. So when the Fed hints that they won’t be pumping in as much money through QE actions – whoosh, down goes the price of gold.
I for one am glad to see the Fed not continue another program like QE that just serves to distort market prices in my opinion. I don’t want any more QE’s as I think the economy can stand on its own. Although I’m very worried about future inflation I don’t think gold would be the best hedge as it has already priced in significant inflation. I’m worried about how the Fed will eventually unwind its massive balance sheet and the consequences that would follow. This unwinding would be a tightening of monetary policy and bad for gold. Gold has been a major beneficiary of the historic easy-money actions of the Fed but at this point the Fed is mostly out of ammo and its actions are producing fewer and fewer marginal gains which are not worth the cost. It’s like the junkie who needs to keep taking more and more to get a high and you know how that story ends. Let’s hope the economy gets stable enough that it will be able to withstand the potential ramifications of this unwinding….