A reassessment of economic prospects should be supportive of precious-metals prices

Par Jeffrey Nichols

Gold took it on the chin after Federal Reserve Chairman Ben Bernanke suggested a possible tapering off of the central bank’s monthly bond purchases later this year if economic conditions continue to improve.

But that’s a big “if.”

Chairman Bernanke said the Fed intends to scale back its monthly purchases of Treasury and mortgage-backed bonds later this year and ending altogether when the unemployment rate has fallen to 7 percent, which the Fed predicts by mid-2014.

But Fed expectations are often unrealized. To be blunt, its track record at forecasting the economy has been dismal - and its forecasts of economic growth made early this year have already proven overly optimistic.

My feeling is that the economy remains vulnerable... and economic conditions will disappoint the rosy scenarists in the months ahead.

This is even truer today as a result of the Fed’s latest policy statement given the rise in medium- and long-term interest rates, the fall in equity markets, and the resurgent dollar exchange rate vis-à-vis America’s trading partners - all of which will restrain rather than promote economic growth.

This will be especially true in the employment market, where the Fed’s target for the headline unemployment rate is still far away and other measures (such as hours worked, average wages, the number of part-timers wanting full-time employment, and the number of discouraged job seekers dropping out of the workforce) paint an even worse picture.

The housing sector, one of the economy’s current hot spots, is interest-rate sensitive could easily succumb to higher mortgage interest rates.

A reassessment of economic prospects should be supportive of precious-metals prices in this year’s second half.

In the meantime, gold remains highly vulnerable to further setbacks given the technical and psychological damage inflicted by this latest sharp decline in the yellow metal’s price.

In the days ahead, much depends on the price-responsiveness of physical demand, particularly in the large Asian markets.  Earlier this year, demand for jewelry, coins, and investment bars surged as private-sector buyers as well as central bankers dramatically stepped up their purchases at prices under $1400 an ounce - and, even more so, whenever prices dipped below the mid-$1300 range.

The question now - and we should know in a few days - will these price-sensitive buyers rush in as they have in the past . . . or will they wait a bit for prices to stabilize and find their natural bottom short-term bottom.

Followers of NicholsOnGold know I’ve been in the bullish camp on gold-price prospects - and I remain so . . . at least for the long term.  I remain confident that we will see gold trading at new all-time highs sometime in the next five years.  Indeed, for investors with a very long-term perspective, current prices will prove to be a bargain.