Gold skyrocketed yesterday on news that the Federal Reserve’s Open Markets Committee announced that interest rates will be held at essentially zero for longer than they originally announced. Last year’s move by the Fed of pledging to hold interest rates at historic lows through the end of 2013 was a blow to the long term strength of the dollar and helped propel gold to an all-time high over $1900 per ounce. Yesterday the Fed announced that interest rates will be held at an effective rate of zero through the end of 2014 in an attempt to further stimulate the stalled economy.
As we have written about several times in the last year, the interest rate environment is probably the most important single indicator of how long gold’s bull run can go. Low interest rates create an investment climate where generating high returns is nearly impossible. This takes away one of the only arguments against gold, namely that it produces no interest or dividend. If nothing else is producing a significant interest rate or dividend, an investor loses very little income in exchange for the safety gold provides. In this sense, the relationship between gold and interest rates is all about opportunity cost. The Fed just pledged that there will be essentially no opportunity cost to owning gold for the next 24 months, and the market reacted accordingly.
Gold started the trading day lower by about $10 per ounce, touching on $1650 before the Fed announcement. It then shot up over $60 per ounce in the latter part of the trading day to close above $1711 per ounce. To put this in perspective, yesterday was one of the three strongest trading days for gold in nearly ten years. This morning’s follow through buying and additional move of over $16 per ounce confirms that we have decisively broken out of the micro trading range we’ve been stuck in for the last couple weeks. If gold’s technical picture continues to improve, it’s a good bet that traders will dive into the feast and help propel the price even higher. Though gold has been relatively quiet for the last several months, it’s looking more and more like this is game on for the gold market, and we all know what that looks like.