china_business_news.pngGold finished lower Tuesday after comments from Ben Bernanke

October 5th, 2011

(MarketWatch) — Gold finished lower Tuesday after comments from Federal Reserve Chairman Ben Bernanke painted a grim picture for the U.S. economy and job growth, dulling the metal’s appeal as an inflation hedge, and as steep losses in global markets prompted investors to sell gold to raise cash.

“Gold is waking up to two sobering facts: that a [third round of quantitative easing] is not on the way, and slower growth worldwide is deflationary and therefore bad for gold,” said Keith Springer, president of Springer Financial Advisors.

“Absent either of those, there’s little reason to own gold — except for a catastrophic hedge, which would be very short lived,” he said.

Gold for December delivery lost $41.70, or 2.5%, to settle at $1,616 an ounce on the Comex division of the New York Mercantile Exchange. The contract had tallied a gain of $40.40 over the past two sessions.

December gold had traded higher in electronic trading ahead of New York floor trade, to touch a high of $1,681.50 as euro-zone leaders delayed a decision on releasing further aid to Greece, setting off another day of nervous trading for global markets.

The December silver contract followed gold lower, closing down 96 cents, or 3.1%, to $29.84 an ounce. Futures prices closed at their lowest level since February.

Has gold’s run come to an end?

Has gold’s stunning run come to an end? And, more importantly, is its status as a safe haven in danger? According to Francesco Guerrera on The News Hub, after a horrible September, investors are starting to lose faith in the yellow metal.

Gold is “really an inflation hedge and the third-world currency,” said Springer, who’s also author of “Facing Goliath: How to Triumph in the Dangerous Market Ahead.”

“Slower growth means no inflation or worse deflation, and a lack of future stimulus, which debases the economy, means less dilution in the currency and less need for the third currency,” he explained.

Need for cash

Earlier strength in the U.S. dollar had dulled gold’s shine but the greenback has since weakened. The U.S. dollar index was last at 79.486, down from 79.561 late Monday, after a high of 79.838.

“Investors sometimes want only the dollar as a safe haven, usually when selloffs in other markets lead investors to sell gold to raise cash,” said Brien Lundin, editor of Gold Newsletter. “That may be in play to some extent today.”

“Even as the dollar pulled back, however, [Bernanke’s] dour comments on the prospects for the economy and job growth, and his opinion that inflation has begun to moderate, led gold to weaken further,” he said.

Despite that, Lundin believes the “bailout efforts in Europe will lead to significant new money creation — their version of QE — and will be very bullish for gold.”

“Investors will begin to realize this as the situation with Greece deteriorates and as ever-more-dramatic bailout plans are implemented,” he said. “In the meantime, however, all markets will be extremely volatile during the transition.”

The moves in metals came as global stock markets dropped sharply again across Europe and Asia after Jean-Claude Juncker, prime minister of Luxembourg and president of the Eurogroup of finance ministers, said late Monday that a decision on whether to hand Greece the next tranche of its bailout would be delayed to allow inspectors in Athens to continue their work.

U.S. stocks traded broadly lower Tuesday, with the Dow Jones Industrial Average recently down 1% to 10,545.26, on track for a third-straight session of losses.

Over the previous two sessions, fears over the worsening European economy had added to the move out of riskier assets and into less risky assets such as gold.

A forecast of recession in the euro zone failed to provide any support for gold Tuesday. Goldman Sachs said it’s now forecasting that the euro zone will slip into a “mild recession” in the fourth quarter of 2011 and first quarter of 2012.

Other metals suffered from broad losses along with gold.

December copper fell 5 cents to end at $3.10 a pound. December palladium closed at $564.15 an ounce, down $29.60, or 5%. January platinum lost $48.50, or 3.2%, to end at $1,468.60 an ounce.