Gold Shines Brighter Thanks to Fed

Source:

"The currency markets' reaction to the Federal Reserve’s recent interest rate cuts has ignited a rally in gold, as investors weigh the benefits of owning the yellow metal versus U.S. Treasuries and the dollar."

As a result, gold has started to shine again as a stable source of value at a time when the dollar and other commodities—like oil and copper—have fallen hard. The spot price of gold has climbed above $870 an ounce on the New York Mercantile Exchange, up about 20% from its October lows.

Gold has been on a roller coaster ride in 2008, moving from its all time high of $1035 in March, to as low as $681 an ounce. Some of that decline occurred during the recent stock market plunge. Its decline was then accelerated by the recent onslaught of financial bailouts, as many investors held a preference for liquidity and safety in the form of cash holdings guaranteed by the U.S. government.

But with the Fed’s recent decision to cut its target interest rate to a range of 0% to 0.25%, the dollar has suffered a significant decline. Suddenly, foreign investors who were scooping up dollars have cut back on their flight to safety, knocking the dollar index (NYBOT: DX) down 10% in the last month. The Fed’s interest rate cut may also have given gold a comparative boost in the eyes of investors. Gold, which never pays interest, suddenly doesn’t look so bad when compared to T-bills, which also are paying zero interest lately.

Consider these wild card inflation indicators that Money Morning Contributing Editor Martin Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009:

• Over $7 trillion of freshly minted U.S. dollars are now in circulation with the aim of saving the global financial system.

• The incoming Obama administration has promised that another $1 trillion or so stimulus package is on the way.

• It’s likely the Fed’s interest rate cuts will soon be followed by central banks around the world.

These economic stimuli are designed to do one thing—get the consumer spending again. When inflation kicks in, the dollar’s buying power will suffer long-term. In fact, we expect a decline in all the world’s paper money, over time. Historically, investors in gold have prospered during periods of weakening fiat currencies.

That leaves gold as a bright light in the investment world, making it an odds-on favorite to open a new leg of a long-term uptrend.

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