Gold ignites as Fed backs cheap money

Prices leap on the central bank's decision to leave interest rates low.

By TheStreet Staff Jan 26, 2012 12:31PM

By Alix Steel

Gold (-GC) was climbing higher Thursday, bathing in the afterglow of the Federal Reserve's commitment to cheap money through late 2014.

Gold for February delivery was popping $24.80 at $1,724.90 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,731.50 and as low as $1,703 an ounce, while the spot price was adding $15.50, according to Kitco's gold index.

Silver (-SI) was adding 35 cents at $33.47 an ounce, while the U.S. dollar index was down 0.3% at $79.22.

Gold prices are still building on Wednesday’s 2% rally, ignited by the Federal Reserve's decision to leave interest rates low through the end of 2014, which means more cheap money in the system for a longer period of time.


Gold was also benefiting from a weaker dollar, as the dollar-backed metal becomes cheaper to buy in other currencies when the greenback falls. With the Fed committed to a weak dollar policy, gold becomes attractive to investors as a wealth preserver.

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Ross Norman, the CEO of Sharps Pixley, believes the move pulled gold over key resistance levels. He sees prices climbing steadily higher. "Longer-term gold players were greatly encouraged by Mr. Bernanke's comments, and there will be a general rebuilding in positions on the Comex," Norman said.

One big obstacle for gold will be the situation in Europe and a better economy in the U.S. "I do think one of the big drags is that the U.S. is placed to make a recovery better than others," Norman said, pointing out that a U.S. recovery will boost the dollar and weigh on the euro, especially if questions remain over the solvency of the southern eurozone nations.

Gold is typically seen as a haven asset -- the worse the situation in Europe gets, the more investors normally would buy gold as protection --  but that hasn't been happening. A stronger dollar has replaced gold as the haven of choice. Norman thinks that there are four or five years left in this bull run and that the gold price could double from current levels at its peak.

Others say the bull run could end in 2013. GFMS, in its 2011 Gold Survey report, forecasts a volatile year for gold prices, with the metal sinking as low as $1,600-$1,550 an ounce and averaging out at $1,760. Then, though, the party's over: "We think the peak would be towards the end of this year or maybe in the first half of next year," said Neil Meader, a research director at Thomson Reuters GFMS.

The end to gold's 10-year bull run would come with a renewed faith in currencies as the structural imbalances that have impeded paper money fade. No revisions have been made to this forecast since the Fed's announcement.

The one downside to gold's big rally is slowing Indian demand. According to GFMS, the first half of 2011 saw very strong buying from India as consumers loaded up on "cheaper" gold. Then demand slowed: The World Gold Council said that jewelry demand tanked 28% in the third quarter. From July to December, gold prices in rupee terms were up 25% as the dollar appreciated against the local currency and as inflation ballooned to 10%, making gold too expensive.

Volatility and high prices tend to result in lackluster demand from India. Consumption from the country is key for higher gold prices, as India and China make up 40% to 50% of global gold demand. Norman thinks that India will eventually get used to higher prices: "Indian traders tend to be bargain hunters, they buy on the dips," he says. 

After roaring to life Wednesday, gold mining stocks, including Barrick Gold (ABX) and Newmont Mining (NEM), were trading about 1% higher Thursday. 


Investors who fear their portfolio values will shrink due to global currency depreciation will soon be jumping on the gold wagon as central banks use easy monetary policies to flood markets with cash to boost ailing economies.  The result is more cheap money in the system for a longer period of time. The dollar was lower against all currencies on the news, which was pushing gold higher as the metal becomes cheaper to buy in those currencies. As the Fed commits to a weak dollar policy, gold will become more attractive to investors as a wealth preserver.

Gold should be seen as a safe haven asset and more investors should buy gold as protection but that hasn't been happening as a stronger dollar has trumped as the safe haven of choice.

Robert Allan Young

Vancouver Gold

Jan 26, 2012 4:48PM
gold bubble? look at the money supply there's the bubble
Jan 26, 2012 10:04PM

And anyone want to compare the price of gold to Swiss Francs over the last ten years?  


Now compare the price of gold to American dollars...  Never would have thought the Canadian Dollar would be worth more that the greenback either...   Another 4 years of Obama, and maybe the Mexican Peso will be worth more too!

Jan 26, 2012 10:01PM

jlum, it's not a gold bubble, its a dollar bubble!  Everything but Real Estate is near all time highs in prices and prices continue their upward spiral as the USA starts contemptaing QE III, IV, V, VI and whatever it will take to print enough greenbacks to cover 15.8 Trillion in debt it can never pay.


Stay fully invested in dollars...  I prefer my Specie...   Specie increases in supply under 1% a year, dollars 10.7% this year and 33% over the last 3 years.... Talk about a bubble...

Jan 26, 2012 10:51PM
Some investors such as Warren Buffet know intuitively and explicitly the meaning of regression toward the mean. Other investors will never understand intuitively or otherwise the meaning of regression toward the mean. That is why the market is balanced by winners and losers.
Jan 26, 2012 1:07PM
Gold is a speculative bubble. Ironically, US dollar is scarcer than gold. For decades people borrowed and promised to pay back with interest in the future. The future is here. Pay back time. But entire money supply is not enough to pay the debt. Google for DEFLATIONARY CRASH to understand why US dollar is the place to be at times of deflation. Despite Bernanke's printing press US dollar has sustained it's value compared to pre-2008 financial crash. This is because our money is not what Bernanke prints, but it is what we borrow. When borrowing is down, money supply shrinks!
Jan 26, 2012 4:07PM
   Gold is almost twice as high as when it hit a record $877.20 in 1980.    There is no stagflation, no double digit unemployment or inflation.  Anyone holding out for higher prices better realize that as soon as unemployment drops a percent or two there is going to be a fire sale on gold.  I've been selling since gold topped $900.00 and I'm taking my profits and running.  Yeah, I could have made more money, but I would rather be balanced in bonds.
Jan 26, 2012 1:39PM
The gold bubble is here.  If gold was such a safe haven, we would all look like Mr. T. and walk around with a ton of gold on our necks.  Gold is all in your head.  That is what a bubble is.SmileSmile
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