Gold and silver fell sharply Wednesday after traders interpreted Fed Chairman Ben Bernanke’s Congressional testimony to mean another round of monetary easing is less likely than expected.
Bernanke also warned that the rise in gasoline could spark temporary inflationary pressure.
Cheap money has been one factor driving investor demand for the precious metals. If interest rates start to rise, the cost of owning a non-interest bearing asset such as gold or silver will rise, too making it less appealing to own the asset.
Both gold and silver had their worst one-day price declines since September. The most actively traded gold ETF, SPDR Gold Trust traded more than twice its three-month average daily volume.
“Bernanke said that another round of bond buying is not off the table,” says Shelley Goldberg, Roubini Global Economics.
But, the overall perception in the market is that there will be less of a need for another round of quantitative easing—or QE3—and that has rallied the dollar and sent commodities lower. Goldberg, however, said the fact that oil prices are relatively high, while gold sells off, is in itself further proof that gold is not an ideal inflation hedge.Page 1 of 2 | Next Page