Gold has now tacked on nearly $300 per ounce since the July 4th weekend. Even after seeing a profit taking sell-off of nearly $60 per ounce yesterday, the metal rebounded and then some this morning, topping $1790 per ounce. Simultaneously, the Dow has again given back all of yesterday’s gains giving up nearly 4%. The selloff in equities comes on the news that the situation is worsening in Europe more quickly than had been expected. It’s now looking as though stock markets are going to continue this downward spiral until they find a proper bottom, and gold will continue this rise until uncertainty is stemmed in other markets.
The long term picture for gold however, changed significantly yesterday with the Federal Open Markets Committee announcement. The Fed promised to maintain the near zero interest rate through at least the middle of 2013 in an attempt to shore up confidence in the failing economy. Though many had expected another round of bond buying, this move by the Fed is actually much more positive for gold over the long term than another round of quantitative easing would have been.
Here’s why: In a near zero interest rate environment, there is little that can cause a long term and sustained correction in gold. Though there will be large rounds of profit taking, the economic framework for significantly lower gold prices just can’t exist when interest rates are this low. Keep in mind that sharpest criticism of gold as an investment has always been that it bears no interest and pays no dividend. Thus there is an opportunity cost in owning gold: The interest that would have been made on the money elsewhere. With interest rates at zero, it has in a sense, never been cheaper to own gold.
Investors who are entering the market now may not get as much gold per dollar as they would five years ago, but they are also not being penalized by not having money working elsewhere. The Fed promised, in no uncertain terms, that this will be the case for at least two more years. It’s no wonder JP Morgan Chase is calling for $2500 gold this year. With this new move by the Fed, we’ve been assured that the single largest threat to gold has been removed from consideration for the next 24 months. Keep in mind the last bull market for gold in 1980. The interest rates that finally stopped the climb: 15.75%. That’s a heck of a long way from where we are now, and from where we will be any time before 2014.