Plummeting gold prices reflect unrealistic expectations about the end of quanitative easing (QE) according to a new report from Sterne Agee. While the Federal Reserve is looking to move away from its policy of maintaining a zero percent interest rate, analysts expect this transition to last for years as the Fed has many reasons to move slowly.
Gold prices have been dropping since Federal Reserve Chairmen Ben Bernanke held a press conference in June where he hinted that he would begin tapering QE in the coming months. The Federal Open Market Committee (FOMC) minutes were largely unchanged in June, but indicated that the Fed was taking a more dovish view of the U.S. economy.
Major firms such as Goldman Sachs took a short position on gold and some analysts predicted that gold could fall from a recent high of $1500 an ounce to high three digits this year. Even then, Goldman Sachs Group Inc (NYSE:GS) stated that this pricing assumes a faster tapering of QE than its own economists expected.
QE Transition to Happen Gradually “Over Many Years”
But Bernanke said that low interest rates need to be maintained while the U.S. economy struggles with high unemployment and low inflation while talking at a National Bureau of Economic Research conference held yesterday. He went on to say that the economy was weaker than the 7.6 unemployment rate represented, and that inflation was still below the Fed’s target of 2 percent. With both major indicators of economic health showing continued problems, he said that it was not yet time to end QE.
The Stern Agee report states that the transition from five years of “extraordinary monetary accommodation” will last for years. The report also says that gold prices will benefit from “better physical demand, supply deferrals, extreme short positions, and marginal changes in market views on taper.”
Report Names Favorite Gold Picks
The report names Newmont Mining Corp (NYSE:NEM) as its top large-cap pick as second quarter performance was in line with expectations and Coeur Mining as a small-cap pick, but it says that many gold mining companies are currently oversold.
Gold investments are often used to hedge against economic crises and sudden currency devaluations. Gold prices often rise during times of uncertainty due to the expectation that gold will retain its value regardless of world events. It is sometimes marketed as a ‘safe harbor’ investment, though this oversimplifies the situation as all investments carry risk. Since gold does not generate returns, unlike stocks in a company or other financial investments, it is considered to be a poor investment during times of growth and its price often drops during times of economic stability.