By Don Miller
Contributing Writer
Money Morning
The reaction of currency markets in recent cuts interest rate the Federal Reserve has lit a rally in gold as investors weigh the benefits of owning the yellow metal front to U.S. Treasuries and the dollar.
As a result, gold has begun to shine again as a stable source of value at a time when the dollar and other materials commodities – like oil and copper – have fallen hard. The spot price of gold has risen above $ 870 an ounce on the New York Mercantile Exchange, up 20% October lows.
Gold has been on the roller coaster in 2008, from its peak of $ 1,035 in March to as low as $ 681 an ounce. Part of that decline occurred during the recent stock market crash. Many investors were forced to liquidate profitable positions in gold to raise money to cover their paper losses.
Its decline was accelerated by the recent attack on financial bailouts, as many investors held a preference for liquidity and Security in the form of cash holdings guaranteed by the U.S. government. This is reflected in rising prices of government bonds and investment in government-backed by banks, which also reduced yields.
But with the recent decision by the Fed to cut interest rates to a range of 0% to 0.25%, the dollar has suffered a significant decline. Suddenly, foreign investors were getting dollars to have cut back on their flight to safety, hitting the dollar index (NYBOT: DX) up to 10% last month. The index shows the dollar value against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
Interest rate cuts by the Federal Reserve may have also given impetus to comparative golden eyes of investors. Golden, who pays no interest, suddenly does not seem so bad compared to Treasury bills, which also are paying zero interest lately.
Volatility has increased this year compared to previous years and recent months have been the most volatile of all – an indication of the ambivalence of investors. But any doubt about the rising price of gold may have been assaulted by the recent rate cut by the Fed and its negative effect on the dollar and Treasuries.
So do not expect this rally to be short lived. As noted in our Outlook 2009 report on gold, the fundamentals in the market for the promise of more gains ahead.
It seems unlikely that central bankers around the world will cease to stimulate the economy by printing money and do what necessary until the growth and confidence are restored – even if the cost is rampant inflation.
Consider these wild inflation indicators card that Money Morning Contributing Editor Martin Hutchinson thinks that will take the gold prices at $ 1,500 an ounce in late 2009:
- Over $ 7 trillion dollars in new U.S. stamp currently in circulation with the goal of saving the global financial system.
- The Obama administration has promised another stimulus package of $ 1 billion or so is on the road.
- It's likely rate cut Fed interest will soon be followed by central banks around the world.
These economic incentives are designed to do one thing – get consumers spending again.
The rescue of the banks was the first step, but banks continue to maintain a strict control over credit. Now the government is seeking readily available, cheap money into the hands of consumers through the implementation of the machines print throughout the day.
"The government is injecting money into banks so much, and that money has to go somewhere," said Hutchinson.
Some of that money will "go out" in the economy in the form of higher prices values. This will make consumers wealthier and could give them more confidence in the economy. More confidence means more spending. As this happens, the prices of goods should start ticking up, giving another booster shot gold prices.
For example, some of that money is already underway in gold bars and coins. In fact, the U.S. Mint was forced to suspend sales Eagle and American popular Gold Buffalo coins for extended periods twice in the last year. The mint could not get blanks Supplier enough gold to meet demand.
"I've never seen a case where the demand was so high and supply was so short," coin dealer Chicago Harlan Berk told The Associated Press.
With large amounts of capital floating around the time it takes to re-inflate The global economy will be much shorter than most analysts expect. Governments fear deflation more than anything. It seems that only combat inflation when they are sure they have won the first battle, which is growth at any price.
When inflation is activated, the purchasing power the dollar will suffer long term. In fact, it is expected to decrease in all paper money in the world, over time. Historically, investors in gold have prospered during periods of weakening currencies of Fiat.
That leaves gold as a bright light in the investment world, so it is an odds-on favorite to open a new section of a long-term uptrend.
target = "_blank"> Read more
target = "_blank"> Investment News About the Author:
Don Miller is an Contributing Writer at Money Morning.
Article Source: ArticlesBase.com – Gold Bugs Have Fed to Thank for Recent Rally
Bhagavan’s Blessings
Mail this post
