April 27, 2012, 12:01 a.m. EDT
The gold market has been “seemingly boring, but rife with more upside potential and downside risk than most investors may realize,” said Brien Lundin, editor of Gold Newsletter.
From the start of this year, the chart of gold futures
GCM2 -0.40% looked like a roller-coaster ride, beginning around $1,600 an ounce, gaining another $200 by the end of February and then trading in a tight range roughly between $1,600 and $1,700 for the last two months.
The gold market has been ‘seemingly boring, but rife with more upside potential and downside risk than most investors may realize.’
Brien Lundin, Gold Newsletter
On Wednesday, the Federal Open Market Committee policy statement and Chairman Ben Bernanke’s news conference “provided little fodder for gold bulls or bears,” said Lundin.
Wednesday’s post-Fed futures settlement showed only a $1.50 decline from a day earlier, but prices had fallen nearly $19 at one point to touch a low of $1,625. On Thursday, prices rallied over $18.
“After initially dropping upon the release of the statement, gold quickly rebounded,” Lundin said. “Obviously, quick-acting traders had […] searched the FOMC statement for any mention of quantitative easing and, having found none, sold gold. But a closer read, and Bernanke’s comments, reveal that the Fed, if anything, is more open to monetary stimulus now than at the last meeting.”
GCM2 1,589.10, -6.40, -0.40%
The market last took a big hit on April 4, sinking nearly $60 an ounce in a single session to settle at a 12-week low after minutes from the Federal Reserve’s March meeting released a day earlier undercut expectations for further monetary stimulus.
And before that, on Feb. 29, gold prices dropped more than $77 to a one-month low, pressured after Bernanke failed to offer an indication of further quantitative easing.
“The Fed influence has become less supportive, with expectations of further QE receding and rates apparently on hold until late 2014 as the U.S. economy makes modest progress,” said Frances Hudson, global thematic strategist at Standard Life Investments.
The Fed probably doesn’t have any sort of “grand plan,” said Vedant Mimani, lead portfolio manager of the Atyant Capital Global Opportunities Fund, a precious metals-focused fund based in Miami, Fla.
Lack of ‘dire straits’
Gold investors may need to resume a wait-and-see approach.
“When things are good, gold declines. When things are bad, gold soars,” said Harvey Rowen, financial advisor and head of Starmont Asset Management. “Right now, the world is unsettled, but not in dire straits, so gold is bouncing around $1,600-$1,700 and is likely stay there until things get better or worse,” he said.
Still, there are many supportive factors for gold. They include expectations that inflation could become a major problem, according to Rowen. A decline in the value of the U.S. dollar, economic uncertainty, political turmoil and a financial crisis may also boost gold prices.
Rowen said none of these events appear imminent, but all could happen.
For now, Matthew Lloyd, chief investment strategist at Advisors Asset Management, expects a wide trading range for gold, with a “slight predisposition to the down side.”
“Gold’s use as a currency hedge is also what will limit its upside as economic stability becomes more a reality than the ‘Armageddon’ that many gold bulls have been arguing for,” he said.
The Fed factor
One thing’s for sure, however. Fed talk and actions will remain key drivers going forward.
“The Fed, at this point, is all-important to the gold market,” said Lundin.
Fed tones down U.S. economic outlook
WSJ's Sudeep Reddy checks in on Mean Street to discuss the Fed's outlook for the U.S. economy, and Laura Meckler talks about Obama's slow jam with Jimmy Fallon. Photo: AP.
“For gold to begin and maintain a major new rally in advance of the fall elections, we will have to see some indications of further Fed easing,” he said. “I think that will happen at some point over the next few months, but it certainly isn’t guaranteed by any means.”
He doesn’t expect the Fed to close the door to further quantitative easing before the U.S. elections or at any point in the next 12 months given the fragility of the economic recovery.
Even so, the Fed putting a halt to further quantitative easing would have dire consequences for prices, with Atyant Capital’s Mimani predicting that prices could fall below $1,100 without this stimulus and in the absence of private-sector credit growth resuming.
“If the Fed were to begin pulling back the reins on easing, it would suggest that the U.S. economy has really started to make significant strides towards a strong and sustained recovery,” said Rick Trotman, senior research analyst at MLV & Co. A strong economy could “translate into a stronger currency, which has historically come at a detriment to [dollar-denominated] gold.”
For now, the bulls and bears have to come to grips with opposing forces.
“Gold is currently in a tug of war between the inflationary policies of the Federal Reserve and the deflationary problems in the euro zone,” said Nathan Rowader, portfolio manager of the Forward Commodity Long/Short Strategy Fund FCOMX -0.08% , a momentum-based fund that invests in 24 different commodity futures. “This will remain the case with the potential turnover in leadership in France and Germany, which will create a hazy environment for economic policies in Europe.”
The Fed supporting an inflationary policy should be good for gold prices, but inflation hasn’t been consistent because of a slowdown in China and a potential recession in Europe, he said.
Best way to play
With so much uncertainty, analysts have a number of suggestions that may help investors.
“The safest way to own gold is to buy physical coins and bars and store them with the safest counterparties in the world,” said Mark O’Byrne, executive director at bullion dealer GoldCore, adding that “normal investors should not attempt to trade the gold market and should avoid the risk of leverage.”
Gold miners, meanwhile, “are at their cheapest levels when compared to the general equity markets and to the underlying metal,” said Jeb Handwerger, editor of market analysis provider GoldStockTrades.com.
Atyant Capital’s Mimani said investors may want to consider exposure to exchange-traded funds such as the Market Vectors ETF Gold Miners GDX +0.30% and Market Vectors Junior Gold Miners ETF GDXJ +0.15% , which his fund owns.
Mimani also said his fund owns stock in Gold Fields Ltd. GFI +0.45% , which “sits on one of the largest gold reserves in the world and currently pays a dividend of around 4%.”
Investors who wish to hedge their bets can buy a gold ETF like the SPDR Gold TrustGLD -0.31% , but if they want an investment that doesn’t move solely on the basis of gold prices, they can buy funds that include gold in their portfolios such as Fidelity Global Strategies FDYSX +0.11% , according to Starmont’s Rowen.
Myra Saefong is a MarketWatch reporter based in San Francisco.
