Investment Banks Are Now Very Confused About Gold

After dropping to a seven-month low of $1,554 an ounce the week prior, spot gold saw its biggest one-day gain since last November after Federal Reserve Chairman Ben Bernanke reaffirmed the central bank’s commitment to easy money policies on Tuesday. But amid weak market sentiment, bearish price forecasts, and record short positions, futures market buyers quickly turned back into sellers as precious metals ended lower for the fourth straight week.

Uncertainty following inconclusive elections in Italy combined with more signs of an improving U.S. economy to bolster the dollar and this too pressured metal prices (recall that gold and silver often move opposite the trade-weighted dollar).

Sales of gold and silver coins in the U.S. were strong in February and central banks continued to buy gold, however, more attention is being focused on the record outflows from gold ETFs, though this should be little cause for concern.

It is now clear that the Fed meeting minutes released on February 20th were widely misinterpreted as Fed Chief Ben Bernanke set the record straight last week regarding the central bank’s ongoing money printing effort. While delivering the bank’s semiannual testimony to Congress, Bernanke made clear that he and most others on the policy committee see no end in sight to the $85 billion per month bond-buying program. Perhaps more importantly, he downplayed the associated risks of creating asset bubbles and producing higher inflation.

In short, any idea that the Fed will halt QE in the near-term or consider interest rate hikes is ill-founded.

[Excerpts from the latest issue of the Weekend Update in the subscribers section of the website.]

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