Gold Price Lower On Federal Reserve Comments

By Dave Brown — Exclusive to Gold Investing News

Gold Price Lower on Federal Reserve Comments

With many traders exiting positions in the gold market, the spot market price was pushed down nearly $100 on speculation that central banks might all be finished with accommodative monetary policies.

Spot market gold prices fell more than five percent on what was seen as the largest single day drop since the world's fourth-largest investment bank, Lehman Brothers, became insolvent in 2008.

On Thursday, spot market gold traded in the range of $1,718.80 per troy ounce, which represented a 3.8 percent total decline over the last week.

Potential impact on gold producers and junior exploration companies

Ultimately if gold prices trade in a lower range, gold miners may face some reduced market valuation due to investors wanting less exposure to the underlying resource. However, since gold equities have not realized a strong correlation in share price appreciation to the price of gold for a considerable time, the effect should be muted. Junior exploration companies should be even more insulated against downside risks than producers, as the market has not realized the potential of their projects.

For investors this may represent a relative convergence, with gold equity values trading more closely to physical gold prices.

A note of caution

The Federal Reserve Chairman appears before the House committee and its counterpart, the Senate Banking committee, twice a year for a formal review and comment regarding the management of monetary policy. During this testimony on Thursday, he emphasized that next January features the expiration of the Bush tax cuts, the payroll tax cut, extended unemployment benefits, and the implementation of large spending cuts to the federal budget.

If unemployment rates disappoint, and growth in the US economy lags behind current expectations, a return to a more stimulative policy could see the Federal Reserve change its outlook to more quantitative easing. This outcome would be interpreted as a bullish signal for the price of gold.