Gold plummets as Bernanke dashes stimulus hopes

By Ross Tucker

Gold prices plunged Wednesday after Federal Reserve Chairman Ben Bernanke indicated that an additional round of quantitative easing was becoming increasingly unlikely.

Gold (-GC) for April delivery plummeted $77.10 to $1,711.30 an ounce on heavy volume at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,792.30 and as low as $1,708.40 an ounce while the spot price was sinking $70.10, according to Kitco's gold index.

Silver (-SI) also tanked, falling $2.56 to $34.64 an ounce, while the U.S. dollar index was rising 0.6% at $78.68.

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Equities gave up early gains as Bernanke suggested that improvements in the U.S. economy may lessen the need for further monetary stimulus. In his semi-annual speech before Congress, Bernanke characterized the pace of economic growth as "uneven and modest by historical standards." However, he acknowledged some improvement in the labor market and said that headwinds like Europe and a weak housing market would fade beyond 2012.

Looser monetary policies -- such as the Fed's quantitative easing -- typically help gold, as investors worried about inflation turn to the metal as a safer store of wealth.

Gold investors were taking the opportunity to lock in recent gains "in conjunction with the Fed Chairman's comments regarding monetary policy," said Jeff Wright, senior research analyst with Global Hunter Securities. "With the recent run up in gold and silver, no fund manager wants to be the 'Bag-Holder' if a true correction back to the $1,600 range occurs."

However, Wright still sees long-term value in gold. "Our thesis of gradual appreciation is still intact but with periods of volatility in both gold and silver markets. I believe longer-term investors will step in to support gold and silver if the sell off continues in the coming days."

Jon Nadler, senior metals analyst with Kitco Metals, noted that in addition to the doubts surrounding a third round of quantitative easing in the U.S., European stimulus may also begin fading.

"The ECB doled out more than $700 billion in loans to over 800 banks this morning in what may have been its last gesture of 'kindness' for a long time to come," said Nadler. "While many are calling the latest ECB operation a 'liquidity injection' that smacks of an outright gift, we would be wise to note that the amounts in question are loans and that they have a three-year shelf-life."

The European Central Bank said it lent a total of €530 billion to 800 financial institutions in Europe as part of its second round of long-term refinancing. Economists had expected the banks to soak up a sum in the €500 billion ballpark.

The morning's stock-market rally had come as investors welcomed upbeat economic news. The Chicago purchasing managers index ticked in at a reading of 64 in February, beating the forecast for 61.5 from Thomson Reuters. The index rose to its highest level in ten months, suggesting that regional business has been picking up.

The U.S. government said that the economy grew at a pace of 3% in the fourth quarter, upwardly revised from its first estimate of 2.8%. Economists had thought the growth reading would stay unchanged, according to Thomson Reuters.

Mining stocks were following metals lower. Among the biggest losers were First Majestic Silver (AG), down 4.2% to $20.85, and iShares Silver Trust (SLV), shedding 4.2% to $34.32. Novagold Resources (NG), was losing 3.7% to $8.26, and Newmont Mining (NEM) was down 3.3% to $59.93.