Good luck trying to predict where gold prices are going, because even the head of the world’s most powerful bank admits he hasn’t a clue.
When asked about the drop in gold prices by U.S. senators during his testimony on monetary policy Thursday, U.S. Fed Reserve Ben Bernanke said decline could mean that investors are less worried about the economy. But he hastened to add: “Nobody understands gold prices and I don’t really pretend to understand them either.”
“Gold is an unusual asset. It’s an asset that people hold as a sort of disaster insurance,” Bernanke said in response to a question at a Senate Banking Committee hearing.
“One reason gold prices are lower is people are less concerned about extreme outcomes, particularly negative outcomes, and therefore they feel less need for whatever protection gold affords,” he said . “A lot of people hold gold as an inflation hedge but the movements of gold don’t predict inflation very well actually.”
Ironically, Bernanke may need to look no further than himself for guidance on gold.
Bullion has tumbled more than 20% this year, losing its safe-haven appeal after the U.S. central bank first signalled it would look to rein in its $85 billion in monthly asset purchases later this year and halt stimulus altogether by mid-2014.
The Fed’s three quantitative easing schemes have boosted prices of gold and other commodities, as they kept interest rates low, which weighed on the dollar, making assets priced in U.S. dollars cheaper for foreign investors.
As if to prove Bernanke’s point, spot gold briefly shot up 1% to a session high of US$1,288.06 an ounce Thursday. That’s following a 1% drop the day before.