How Will Gold React to Bernanke’s Speech at Jackson Hole?

Tomorrow will feature the long awaited Jackson Hole speech from Federal Chairman Ben Bernanke. Investors will be reading into Bernanke’s every word as they look for some kind of hope that the Fed will step in to provide more help for our economy, specifically in the form of QE 3. It has been rumored for months that Bernanke will be announcing a third quantitative easing program any day now, and all investors can do is wait [for more economic news and analysis subscribe to our free newsletter].

But it seems more and more unlikely that Bernanke will make any kind of move with his Friday speech, as there doesn’t seem to be any motivation to do so. Since he last spoke to congress, there has been no major downturn in the economy, and in fact, stocks have neared four year highs. Of course it goes without saying that our massive debt piles are also keeping Bernanke from printing any more money for the time being. Another factor to consider is the fact that president hopeful Mitt Romney has been outspoken on his distaste for Bernanke and his plans to not re-elect the chairman. It seems unlikely that Mr. Bernanke would put a massive spending program in place the he himself would not be able to personally oversee. Finally, yesterday’s strong GDP revision comes as yet another sign of economic stability and therefore no need for more easing.

All that being said, there is also a historical precedent for how quantitative easing programs have been announced. Both QE 1 and 2 were announced in November of 2008 and 2010 respectively, after the Jackson Hole Speeches. It would make a lot of sense for this pattern to continue in 2012 if indeed a QE 3 is in the works. Bernanke will likely wait until after the election results to make any kind of major move regarding money printing [see also How to Play a Republican Party Gold Standard Commission].

But all of the talk and speculation has investors clamoring and one asset in particular acting up, gold. Gold has the most to lose and gain from tomorrow’s speech, as its performance will be heavily impacted by a possible round of asset-purchasing. A renewed program would mean a debasing of the dollar and a flock to gold as investors will be fearful of the future of our fiat dollar. On the other hand, if Bernanke disappoints, gold could see a heavy sell-off from those betting on a new QE. It should be noted that Bernanke has a tendency to hint toward future actions at Jackson Hole, so a lack of announcement may not necessarily be a bad thing for gold; investors will need to carefully decipher the entire address [see also Three Reasons Why Gold Is Overvalued].

While it cannot be said with certainty which way gold will move tomorrow, the commodity will surely be active and offering plenty of trading opportunities. Below, we outline several ways to make a play on this precious metal for anyone looking to speculate on this speech from Bernanke.

  • SPDR Gold Trust (GLD): One of the most popular options for trading gold, as this physically-backed ETF trades more than 8 million times each day. Despite all of the backlash and conspiracy surrounding this product, it still makes for a great speculative tool for investors.
  • COMEX Gold Trust (IAU): For those looking to make a long-term buy, IAU’s expense ratio comes in at 15 basis points cheaper than GLD while offering 100% gold allocation and physical exposure.
  • UGLD/DGLD: Are you an active trader ready to put your money where your mouth is? Look no further. These two leveraged products offer 300% and -300% exposure to gold futures, making the the perfect tool for those who have very strong convictions on gold’s very near term future. Note that these funds are extremely dangerous and should only be used by experienced traders who fully understand and accept the massive risks.

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Disclosure: No positions at time of writing.

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