Anyone who owns gold, gold futures or the SPDR Gold Shares (GLD) can thank the Federal Reserve — and only the Federal Reserve — for pulling your fat out of the fire in mid-June.
Had it not been for Janet Yellen’s surprisingly dovish comments back on June 18, gold prices (not to mention silver prices) would have ended deep in the red for Q2. Instead, GLD ended the quarter up 2.6% after the Fed’s chairperson made it clear she intends to keep interest rates low for much longer than first presumed.
Silver prices and the iShares Silver Trust (SLV) fared even better, even if all of their 6.4% gain in Q2 came in the last week-and-a-half of the quarter.
The major reversals and the big gains that caused them, of course, raise two key questions: Why, and will it last? As always, it depends.
Why Gold Prices Slumped, Then Surged in Q2
Just as a refresher, gold prices and GLD didn’t exactly hit the ground running at the beginning of the second quarter. Although the world’s most sought-after metal posted gains of 6.4% in Q1, it was up as much as 14% for the quarter in mid-March; it simply spent the last two weeks of Q1 pulling back.
Gold prices saw a modest bullish pop during the first two weeks of April, too, rallying from $1,284 per ounce at the end of March to a peak of $1,331 by mid-April. But again, it was strength that wasn’t meant to last. Certain that the Federal Reserve was in a hurry to do anything to put the brakes on what looked like an overheating economy at the time, traders let gold prices slide all the way to a low of $1,240 by early June.
It wasn’t an entirely bad bet, either.
With the first hints of inflation popping up in mid-May when the annualized inflation rate for April surged to 1.95%, surely Janet Yellen would recognize that the era of cheap money and low interest rates would have to come to a close soon.
Nope. She didn’t. Though the Federal Reserve is still tapering its bond-buyback efforts, the Fed chairwoman has made it clear money is going to remain cheap into 2015 despite more hints of firming inflation unveiled in mid-June. May’s annualized consumer inflation rate rolled in at a multimonth high of 2.13%, yet Yellen seemed largely unfazed.
If Yellen isn’t worried about inflation, maybe the gold bugs shouldn’t be either.
The chart of gold prices, 10-year Treasury yields and the U.S. dollar index below makes clear how it all shook out. Although the usual relationship between the three was a little fuzzy for most of the second quarter, the last two weeks of Q2 made perfect sense — the U.S. dollar as well as interest rates slumped, making gold a (relatively) desirable asset again.
Ditto for silver prices, as seen on the chart of SLV. For the third times since mid-2013, silver prices have found a floor around $18.60 per ounce, and for a third time pushed up and off of that level. But, we saw a similar thrust in January, and that surge fell apart rather quickly.
What’s Next for Gold Prices?
The sharp rise in gold prices on June 19 following the modest rally between early in the month and June 18 immediately rekindled gold’s bullish rhetoric … though that’s not a tough thing to do these days. More than enough market participants remain enamored by gold and/or soured on stocks, and will choose to drink the gold-colored Kool-Aid even on the flimsiest of reasons.
Throw in the fact that Treasury yields and the sawbuck are both back in downtrends, and the bullish case for gold seems plenty plausible.