Many in the investment community have been sounding the warning bells over the future direction of gold, given all that’s occurring in the global macroeconomic landscape. Using the SPDR Gold Trust (ETF) (NYSEARCA:GLD) as a proxy, the yellow metal is down more than 17% this year, and the 12-year rally for the commodity looks to be in real jeopardy. While industry insiders, like Goldcorp Inc. (USA) (NYSE:GG) President and Chief Executive Office Chuck Jeannes, believe the rally will continue, there are some grim signs.
There is, however, another view that supports buying gold right now and viewing the sell-off as a major buying opportunity. Under this view, the run-up in the stock market is driven almost entirely by the Federal Reserve and when the central bank’s easy money policies come to an end, the ensuing carnage will drive investors into hard assets. As gathering evidence suggests that the Fed is considering at least slowing the rate of quantitative easing, you should consider this view in approaching gold investments.
The 2013 gold outlook
When Goldcorp Inc. (USA) (NYSE:GG) recently announced earnings — missing analyst expectations by a wide margin — the company maintained its full-year guidance. It’s easy to dismiss this optimism as the predictable view of a mining CEO trying to support his stock, but given the size of the miss, it was also a real opportunity to lower expectations. Jeannes also stated in the earnings call that he believes the multiyear rally will be extended by the end of 2013.
Last week’s Fed minutes show that a growing contingent inside the Federal Open Market Committee favors slowing or ending QE. In his testimony before Congress, Chairman Ben Bernanke warned of the risks of prematurely ending the policy but acknowledged that if the economy continues to show signs of strength, the Fed may be able reduce the $85 billion per month of bond buying by this fall. The Fed’s QE policy has been widely viewed as creating inflation risk and bullish for gold; not only has that inflation remained at bay, but if QE ends without the arrival of the expected inflation, gold may come under pressure.
So why buy gold?
In a recent article from The Wall Street Journal, Paul B. Ferrell presents a compelling argument as to why Bernanke could be out of the Fed by August, that QE could end, and that the stock market could crash as a result. He considers several factors that could lead to a rapid rise in interest rates and the ensuing impacts. Ultimately, he is calling for an end to the Fed-driven bull market.
Vice Chairman Janet Yellen seems to be the expected choice to replace Bernanke at the central bank, but her likely actions are unclear. She’s known to favor easy money as much as or more then Bernanke, but she has also stated that she is willing to raise rates when necessary. The Fed’s balance sheet has been expanding at an alarming rate over the past several years that cannot continue indefinitely.
