Gold And Silver Lose Glitter After Fed Minutes


Investors hammered gold and silver prices to new lows Wednesday while bidding up the dollar after Federal Reserve minutes revealed that several members want to curb the central bank's economic stimulus programs sooner than expected.

Gold miners stocks crashed to their lowest levels in nearly four years while silver miners collapsed to six-month lows. But gold bugs remain undeterred on expectations that the Fed will have to continue quantitative easing, commonly seen as printing money, to support the economy.

Spot gold prices melted 2.6% to $1,564 an ounce.

SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, on the stock market today  slipped 2.5% to 151.43 -- its lowest close since late June. Volume swelled to nearly three times average.

PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, climbed 0.8% to 22.14 -- a three-month high. Although it's regained its 50-day moving average, it still trades below its 200-day line, which means it's still in a long-term downtrend. Gold and the dollar usually move in opposite directions as it takes fewer dollars to buy gold when it's stronger.

"The underlying driver behind the sell-off in gold, both today and for the past four months, is the realization that QE is coming to an end and that interest rates could start rising in the U.S., which in turn is bullish for the U.S. dollar," Paul van Eeden, president of Cranberry Capital, a private Canadian holding firm, said in an email.

Hawkish members of the Fed suggested that QE3, the third round of quantitative easing, could be tapered or ended possibly this year before the labor market outlook improves.

"If markets do not expect the Fed to stay the course, then expectations for economic growth and inflation will stay depressed and demand for safe assets (cash and government securities) will remain high," Paul Edelstein, U.S. economist at IHS Global Insight, wrote in a media commentary. "Counterintuitively, this means lower long-term interest rates, not higher."

Higher demand for dollar and risk-free Treasuries would drive up the dollar's value and bond prices, thereby pushing down interest rates.

"Already, the stock market is down 1% (suggesting weaker growth expectations), gold is off 2.6% (suggesting weaker inflation expectations), and the dollar is up about 0.7% (suggesting stronger demand for safe assets)," Edelstein added.

Gold Miners Hit 2009 Low

Market Vectors Gold Miners ETF ( GDX ) nose-dived 4.8% to 37.49, its lowest level since August 2009.

Both GLD and GDX have fallen deep below their 50- and 200-day moving averages, indicating a very strong downtrend. But some analysts see them as oversold, which makes them prone to sudden snap-back rallies on bargain buying as well as short covering, in which traders have to buy shares to close their short positions.

"Gold is very oversold and likely near an intermediate-term bottom, and stocks are likely at or near an intermediate-term top," said Harry Dent, founder of economic research firm HS Dent in Tampa, Fla. "There could be a surprise move down of 8% to 10% in stocks and a rally in gold over the next few months."

U.S. stocks have reached fair value on a near-term basis now that the S&P 500 is trading at 13.8 times earnings in the face of slower profit growth, according to Alec Young, global equity strategist at S&P Capital IQ. He believes the positive news out of the U.S., Asia and Europe have already been priced in, leaving investors to focus on fiscal and political risks, he wrote in a client note.

The gold miners are now trading as though gold trades for about $1,000 an ounce, presenting an excellent bargain-buying opportunity, says Peter Spina, president of in Littleton, Colo.

"The volatility is reaching an extreme here and likely to reverse soon," he wrote in an email.

Spina believes the Fed has to continue quantitative easing to support a "stagnant economy." If the Fed pulled the plug, the economy would contract.

"Our entire system is now built on this artificial money printing, and I do not fall for this idea this will end," Spina said in an email. "A stagflationary economy is developing, which will continue to see money printing used to keep the game afloat."

"The market fundamentals remain strong and I believe nothing changes in the long-term picture, even if this short-term pullback damages the psychology of traders," he added.

"Yes, it looks scary if one doesn't understand the fundamentals. But the whole complex of investments are selling off due to the measly $85 billion sequester (government spending cuts)," Victor Sperandeo, CEO of EAM Partners and Alpha Financial Technologies in Grapevine, Texas, said in an email. "Meanwhile, with $225 trillion in debt around the world, if the crash comes, gold will survive and stocks will drop. So gold is a better fundamental play in the long run. Borrowing and printing are death in the long run."

Silver Prices

Silver prices dropped 3.1% to $28.64 an ounce.

IShares Silver Trust ( SLV ) skidded 3.0% to 27.59 -- a six-month low -- in more than double average volume.

Global X Silver Miners ETF ( SIL ) plummeted 4.8% to 18.36 -- its lowest price since August.

Both SLV and SIL have tumbled deep below both their 50- and 200-day moving averages, typical of a strong downtrend, but are also seen as oversold by some measures. Platinum and palladium fell about 3% each.

Follow Trang Ho on Twitter @TrangHoETFs .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: GDX , GLD , SIL , SLV , UUP

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