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Taper Fail Gives Gold Prices A Boost

20 September 2013 in Trading Ideas

You may have noticed after the Federal Reserve decided on Wednesday to unabashedly continue its bond-buying program that stocks took the cue to surge immediately higher.

But did you notice that gold and silver prices left the performance of the major stock indices in the dust?

While the S&P 500 rose 1.2% on Wednesday, gold prices, for example, jumped 4.2% to $1,365 an ounce, ending a month long slide as investors were turning away from precious metals in anticipation of a pullback by the Fed. Thursday, the rally trended forward with for a 0.1% increase to $1,367 an ounce. The Precious Metals motif is off 6.9% in the past month. During that same period, the S&P 500 has gained 4.4%.

So far in 2013, the motif has lost 38.6%; the S&P 500 has increased 19.6%.

But Wednesday was a new day. Even more impressive were silver prices, which gained 5.5% to $22.95 an ounce – also inching up 0.1% Thursday to $23.12 an ounce.

precious metals motifThe performance of precious metals on Wednesday was right out of the conventional-wisdom playbook. Where investors spent the last month shedding precious-metals holdings because they anticipated the Fed would taper its bond buying, now traders were inclined to think that steady purchases could cause inflation and weaken the dollar – two things that tend to boost gold and silver prices. (The dollar fell against other currencies on Wednesday).1

As Tom Winmell, manager of the Midas Perpetual Portfolio and Midas Fund, told Investor’s Business Daily, “The Fed is saying it wants higher inflation and lower interest rates. This is an ideal prescription for a robust gold market.”2

Another investor, Adrian Day, president of Adrian Day Asset Management told IBD that both precious metals prices and miner stocks are oversold, offering the potential for a strong short-covering rally. Day said mining stocks currently trade at 2001 levels, suggesting a potential value-investment buy.

Still, not everyone is bullish. Goldman Sachs analysts see gold falling to $1,050 by the end of 2014 on expectations that the economy will improve, reducing the need for Fed stimulus.

On Wednesday, however, precious metals certainly regained a glitter that was beginning to fade.

1Associated Press, “Gold surges most since 2009 as Fed keeps stimulus,” Sept. 18, 2013, http://finance.yahoo.com/news/gold-surges-most-since-2009-212750712.html.

2Trang Ho, “Gold, Silver Ablaze After Fed’s No Tapering Surprise,” Investor’s Business Daily, Sept. 18, 2013, http://news.investors.com/091813-671583-gold-silver-prices-ablaze-fed-surprise.htm?ven=yahoocp&src=aurlled&ven=yahoo.