Gold ignites as Fed backs cheap money

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.