Federal Reserve Chairman Ben Bernanke had a few things to say during recent testimony. It looks like we’ll see a temporary rise in inflation from the jump in oil prices. But for the long haul, the rate likely will be “subdued.” And for the most part, there continues to be lots of slack in the U.S. economy.
But word was mum on quantitative easing.
The QE silence definitely wasn’t good for gold bulls. In Wednesday trading, the April gold futures contract finished down 5.1% lower to $1,698.10 per ounce. The SPDR Gold Trust (NYSE:GLD) ended the day 5.3% lower, and gold miners like Barrick Gold (NYSE:ABX), Newmont Mining (NYSE:NEM) and Goldcorp (NYSE:GG) also were battered.
Now keep in mind that gold already has staged a nice 11% rally this year, so a correction certainly was in the cards. But gold bugs shouldn’t necessarily be worried.
Bernanke’s view on inflation may be somewhat narrow. Keep in mind that Europe is likely to engage in easy monetary policy to deal with its bailouts. There is likely to be looseness in China as well, as the economy is showing signs of weakness.
If anything, it looks like there may be a new wave of inflation across the emerging markets. This should spur demand for gold as investors try to find ways to avoid the erosion of purchasing power of their currencies. China has been reducing regulations on gold ownership, and as a result, large banks now offer gold-denominated savings accounts.
Another catalyst could be geopolitical risk. With the U.S. presidential election approaching, it would not be a surprise for Iran to continue to rattle the saber and create more havoc. If this results in hostilities, expect gold to surge.
Investors have several ways to play gold. It might be tempting to buy the miners, but this can be a tough trade. One key problem is the increasing costs — such as for labor and energy — which have pressured margins. If you want a pure-play approach instead, the best method probably is to focus on a bullion-backed ETF like GLD or the iShares Gold Trust (NYSE:IAU).
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
