The decision by the Federal Reserve to keep interest rates low has bolstered the fundamentals of the gold market, pushed the price into overdrive, and put out a huge buy gold signal to prudent and knowledgeable investors. Posted by James Randolph on January 31, 2012
Low Interest Rates Signal a Buy in Gold
January 31, 2012 – The decision by the Federal Reserve to keep interest rates low has bolstered the fundamentals of the gold market, pushed the price into overdrive, and put out a huge buy gold signal to prudent and knowledgeable investors. Gold has gained 9.4 percent year to date, picking up 4.4 percent last Wednesday. The Federal Open Markets Committee released a statement Wednesday indicating that it will keep interest rates at what it terms “exceptionally low levels” until late 2014. Previously, the benchmark for persistent low interest rates had been set at mid-2013.
The immediate effect in the gold market was the skyrocketing of the price of gold above $1,700 an ounce. The $1,700 an ounce level has not been seen in the gold market since December before the start of the correction. Many analysts, during the strongest parts of the correction, wondered whether gold had actually entered a bear market. One analyst publicly sold his gold and has since very publicly admitted his error.
The fundamentals told a different story, indicating the gold market was simply in a correctional phase and would again resume its upward climb. Ironically, those fundamentals, specifically the low interest rates, are the same that were reinforced by the Federal Open Markets Committee’s statement on Wednesday. Persistently low interest rates mean gains in the inherent value of tangible commodities over time. The Federal Reserve’s policy of low interest rates has not changed since the start of the War on Terror, essentially, and the thrust of the policy has accelerated during the ensuing economic crisis. The price of gold in the same time has been a long upward curve, bringing us all time highs and ten-year bull market.
Last wednesday’s pronouncement means the bull market in gold will continue well into 2014. The Fed, by some analyses, cannot raise interest rates in their current position with seriously risking the possibility of recovery. Unfortunately for them, that puts them between a rock and hard place, as they can only keep rates low and hope the economic situation improves over the coming two years. In the meantime, however, chronically low interest rates can only benefit the price of gold and continue the gold market trends that have been guiding the market for a decade.
Just as persistently low interest rates have benefitted the price of gold since the Fed adopted the policy post-9/11, the announcement of low interest rates into 2014 signals an opportunity to buy gold now and benefit from the monetary policy the Fed will be pursuing through 2014.
Senior Staff Writer – Certified Gold Exchange