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Bernanke's inaction sends gold prices plunging

U.S. Federal Reserve Chairman Ben Bernanke testifies before the House Budget committee hearing on the state of the Economy on Capitol Hill in Washington, in this February 2, 2012 file photograph.


Investors took flight from gold , sending it down by nearly $100 (U.S.) an ounce after the Federal Reserve chairman delivered three hours of testimony without once indicating he felt the need to create more money.

The downdraft in gold spread to silver , which had been trading at $37 an ounce before the rout, but fell to $34.65 in late trading. The big hit to precious metals was a major factor in a fall on the resource-dominated Toronto stock market.

"Clearly, the single most identifiable catalyst was what Bernanke didn't say," said Jon Nadler, senior analyst at Kitco Metals, a Montreal-based gold trader.

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Gold's plunge to less than $1,700 an ounce marked the biggest one-day percentage drop for the metal in more than three years. Mr. Nadler said some investors had been expecting that Mr. Bernanke, in Congressional testimony, would indicate the Fed was open to another round of so-called quantitative easing – a policy that creates new money and causes people to flock to the perceived safety of gold to protect themselves from inflation.

Instead, Mr. Bernanke merely delivered a cautious assessment of the recovery. He said he remains unimpressed by the recent pickup of activity in the U.S. economy, and told lawmakers that the number of long-term unemployed was a "reason for urgency" because the longer people remain out of work the harder it is for them to win new jobs.

But not so urgent that Mr. Bernanke thought it necessary to signal the need for further monetary stimulus.

As he spoke, orders to sell gold poured onto futures markets, causing speculators to panic and liquidate positions, creating a vicious circle of prices plunging even more and additional selling pressure.

During the early stages of the price collapse, Mr. Nadler said, there was a huge order to sell about one million ounces of gold, further spooking market players.

Evidence that the United States economic has turned a corner is piling up, including a sharp drop in the unemployment rate to 8.3 per cent in January from around 9 per cent for much of 2011. Stock markets generally are on an upward trend.

U.S. gross domestic product expanded at an annual rate of 3 per cent in the fourth quarter, compared with a previous estimate of 2.8 per cent, the Commerce Department said Wednesday. Another report showed manufacturing activity in the Chicago area increased faster than Wall Street analysts were expecting in February. Anecdotal evidence collected by the 12 regional Fed banks suggests the recovery is gaining traction, according to the latest Beige Book, which also was published Wednesday.

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Yet Mr. Bernanke is reluctant to make too much of it, a stance that is frustrating some economists who say the Fed risks falling out of step with the economic reality.

In his testimony Wednesday, he acknowledged that 2012 is looking up, but described the data to date as "limited," suggesting it will take at least a couple of more months of positive data to sway the Fed in another direction. Mr. Bernanke gave no indication that he intends to rethink plans to leave the Fed's benchmark lending rate near zero until at least he end of 2012.

"Notwithstanding the better recent data, the job market remains far from normal," Mr. Bernanke said in his opening statement to the House Financial Services Committee.

He appeared skeptical the unemployment rate would continue its fast decline, saying "continued improvement in the job market is likely to require stronger economic growth in final demand and production."

Few expect such an improvement. The U.S. economy is growing barely fast enough to generate a significant number of new jobs. With the European debt crisis unsettled and oil prices rising because of worries over the political situation involving Iran, the recovery is running into considerable headwinds. Another recession appears unlikely, but it will be difficult for the U.S. economy to maintain its momentum.

A buildup of inventories was the biggest driver of economic growth in the fourth quarter, suggesting output could slow a bit in the first half of 2012 as companies sell from stockpiles. Consumption was stronger at the end of 2011, and recent consumer confidence indicators indicate that could continue. Trade is subtracting from GDP because of weaker demand from Europe.

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According to the Beige Book, the economy "continued to increase at a modest to moderate pace" in January and early February, the same assessment made in the last report on Jan. 11. In November, the Beige Book described the economic growth as "slow to moderate."

Quantitative easing, or QE, sees the Fed add to banks' reserves by creating money to purchase financial assets. Mr. Bernanke told lawmakers that much of that money is unspent; that suggests the Fed believes its previous efforts to stoke demand could yet help the economy – once lenders feel better about their prospects.

"They are sitting there," Mr. Bernanke said of the banks' reserves. "They aren't doing much."

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About the Authors
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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