Brokers Braced For Gold Slide After Bernanke Speech
By Tatyana Shumsky NEW YORK--After watching Federal Reserve Chairman Ben Bernanke outline a plan for rolling back the central bank's stimulus program on TV Wednesday afternoon, Bill Baruch, a futures broker with ii Trader, braced for a busy night. "I got to bed early, thinking that when Europe opens up this thing is going to hit the fan, and that's exactly what happened," Mr. Baruch said. He went to sleep at 10 p.m. but was back at his computer by 1:30 a.m. to trade at the opening of the European markets, he said. "Days like this you just suck it up and do what you have to do," Mr. Baruch said. Like many of the futures market's intermediaries, Mr. Baruch was gearing up for a day of heavy trading volume as clients, who had a night to digest the Fed news and weigh its impact on their investments, would rush in to sell gold. Mr. Bernanke said in a news conference that as long as economic growth remained on track the central bank would begin reducing its $85 billion-a-month asset-purchase program later this year and could end the stimulus measure by the middle of 2014. The eventual siphoning off of the added liquidity from the U.S. capital markets is expected to raise interest rates and damp inflation, adding further pressure on gold prices. For brokers and the investors that they serve, this signaled the end of gold's bull run. "There was no doubt in my mind when I left the office last night that what the Fed said was incredibly bearish for gold," said Graham Leighton, a precious-metals broker with Marex Spectron. Gold prices had fallen steadily in after-market trading Wednesday, as the Fed's policy decision and Mr. Bernanke's subsequent news conference occurred well after Comex floor trading ended for the day. "What really stood out to me was how often Bernanke mentioned the potential slowing of asset purchases throughout the press conference. That was by design, it was to communicate that that's where the Fed is leaning," said Jason Rotman, president with Lido Isle Advisors, a commodities investment management firm. Mr. Rotman said he started betting on lower gold prices about a week ago, when gold rallied above $1,390 an ounce. "I had a gold-price target of $1,339. I didn't think it would be hit in the next five hours, but it was hit last night," Mr. Rotman said. He is now looking for gold to sink to $1,242 a troy ounce. Gold's losses accelerated overnight, as investors in Asia and Europe had their first chance to react to the news. "The perception of the gold trend has totally changed. It's becoming an incredibly difficult environment for gold," said Yu-Dee Chang, head trader at commodity trading advisor Ace Investment Strategists LLC. "This morning, we anticipated it dropping, but I would never expect it to be down 80 bucks," Mr. Chang said. Gold for August delivery, the most actively traded contract, was recently down $82.70, or 6%, at $1,291.30 a troy ounce. The contract breached below $1,300 an ounce for the first time since September 2010 in pre-market trading early Thursday morning. Many of gold's largest supporters have been streaming out of the market since the start of 2013, as talk of a likely end to the Fed's bond buying program grew from a whisper to a crescendo. Large investors like Northern Trust and BlackRock pared their gold holdings during the first three months of 2013, according to filing with the U.S. Securities and Exchange Commission. "If you're handling $2 billion, you have to look a year out, and with inflation low and Bernanke talking about an exit, you have to do something now. So you've been seeing all of these big funds already get out of gold, because when you're a big investor you can't just exit on a whim," Mr. Baruch said. "That's why we've seen gold move already, just over the last several months. Because the big fund managers are preparing for that already," Mr. Baruch of ii Trader said. Gold bullion held by exchange-traded funds, which trade and store the physical metal on investors' behalf, has slumped 20% to 67.88 million ounces from a record of 84.6 million ounces in December 2012, according to data from TD Securities. "Over the past 10 years, we've had this huge build up in gold holdings not only in the retail sector, but also in the institutional sector, and people are just getting better returns elsewhere right now," Marex Spectron's Mr. Leighton said. "Gold is an asset that costs you to hold it," because you lose out on gains elsewhere, he added. Still, billionaire investor John Paulson, who owns the largest stake in SPDR Gold Trust (GLD), the world's largest gold-backed exchange-traded fund, chose to stand pat during the first quarter, keeping his stake in the GLD unchanged, according to regulatory filings.
Dow Jones Newswires June 20, 2013 12:54 ET (16:54 GMT)
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