Did the Federal Reserve Ignite a New Gold Rush?

Wall St. Cheat Sheet

It has been a punishing year for the price of gold. After enjoying twelve consecutive annual gains unscathed, the precious metal is one of the worst performing assets in the market this year. Sentiment reached fresh lows, and many investors simply threw in the towel amid a stock rally that doesn’t seem to quit. However, the Federal Reserve’s recent decision to keep purchasing bonds at its current pace has breathed new life into gold investors.

Since hitting all time nominal highs above $1,900 per ounce more than two years ago, gold has suffered an ugly correction. Over the course of only two days in April, gold plunged $200 to reach its lowest level since February 2011. In the process, gold posted its worst one-day percentage drop since 1980, the largest fall in dollar terms on record. On a technical basis, the precious metal reached its most oversold reading since at least 1975. Despite the dramatic price movement, precious metals appear to be picking up momentum.

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On Wednesday, the long-awaited statement from the world’s most powerful central bank arrived. The Federal Reserve decided to maintain its monthly bond-purchasing programs at their current pace with $40 billion in agency mortgage-backed securities and $45 billion in long-term Treasuries. Most economists and analysts expected a monthly bond taper of about $10 billion to $20 billion.

The FOMC statement explained that, “Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

The mostly unexpected move sent the Dow Jones Industrial Average and S&P 500 to new all time highs, but gold and silver outperformed the entire market. In fact, it was the best single-day performance for gold in over four years. Shares of the SPDR Gold Trust (NYSEARCA:GLD) jumped 4.4 percent, while the iShares Silver Trust (NYSEARCA:SLV) gained 6.4 percent. Precious metal miners performed even better.

Shares of Barrick Gold (NYSE:ABX), the world’s largest gold miner, jumped nearly 10 percent, while Newmont Mining (NYSE:NEM) and Yamana Gold (NYSE:AUY) both increased more than 8 percent. Silver names, such as First Majestic Silver (NYSE:AG) and Endeavour Silver (NYSE:EXK), surged 11.7 percent and 16.7 percent, respectively.

With precious metals receiving more support from the Federal Reserve, some major financial players are changing uniforms. Last week, Goldman Sachs said gold could accelerate to the downside and trade below $1,000 per ounce. However, now the firm believes there is upside in the precious metal due to the delayed bond taper, at least in the short term.

Furthermore, Bank of America admitted it was wrong to bet against silver. ”The Wednesday Bullish Candlestick formations (Bullish Engulfing Candles) in gold and silver say that our bearish view on precious metals now incorrect. Indeed, this is supported by the US $ breakdown and the increasingly constructive environment for risk assets generally. As such, we are cutting our Silver Short and moving to the sidelines.”

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Disclosure: Long EXK, AG, HL, PHYS

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