Russian Fed
FED decision supports the gold price
Fed, the central bank of America, decided to keep the interest rates low and continue the Quantitative Easing in its meeting on Wednesday afternoon. This was pretty much what the markets were anticipating but still the price of gold dipped before the meeting since some bargain hunters speculated that another outcome would be possible.
The price climbed back up relatively fast after the announcement so the effect on the markets was fairly minimal. The more important outcome of the meeting is that the U.S government doesn’t believe that the country can climb out of the recession on its own. This should be positive for gold in the long-term since when the Fed keeps printing more Dollars the price of gold is likely to keep going up.
Falling bond yields are supporting the conclusion we can make from the Fed’s announcement since, according to conventional monetary theory, a decline in the bond yields suggest that the economy is slowing down and in extreme conditions it might even face a deflation. This is why Fed decided to continue the Quantitative Easing program since pumping more money into the system should prevent the risk of the deflation.
The drought in the Middle-Asia should also support gold prices since it has destroyed a significant amount of the crop in Russia and Kazakhstan. Because gold sits in the same basket with the other commodities, such as grain, oil, base metals etc, it is sensitive to any changes in commodity prices.
Russian’s Prime Minister Vladimir Putin announced that Russia will restrict its grain exports from 15th August onwards. Last time when the crops were damaged by drought and the restriction were introduced in 2007-2008, the gold price went up $350/oz from $650/oz up to $1000/oz. Though, this time the damage shouldn’t affect prices so dramatically since we have had a surplus harvest in the two previous years, it is none the less supportive of gold.
The debate about what is the most likely outcome of the U.S economic crisis, deflation or inflation, has been going on few months now and seems that both options have a strong support group. Whichever the outcome is going to be, gold should offer a relatively safe protection from both. The latest bull run for gold started in 2001 and between 2001 and 2008 it protected investors from inflation when the economy was growing and credit cycle was expanding. After 2008 it has been a safe haven and insurance for investors in falling markets.
Gold seems to have developed a new feature in the current economic situation since it has been used as liquid money between banks in the past few months. Gold hasn’t been used in this kind of matter in decades, mainly because the U.S Dollar has been the main medium of exchange. The depreciation of the Dollar has been so severe in recent years that banks have been forced to seek another option to secure their liquidity.
The U.S economy is facing many challenges at the moment but we think that the most significant news came from China last week when it announced plans to liberalize its gold markets. This could increase demand for gold considerably in the coming months and years.
About the Author
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