Prior to the Federal Reserve’s 50 basis point interest cut to 3%, gold was down $3.60 to $921.20 per ounce in trading in New York yesterday and silver was down 4 cents to $16.74 per ounce. Gold surged (from $920 to $934.25) to new record highs after the interest rate decision at 2:30 p.m (1930 GMT) in after-hours trading on the Comex division of the New York Mercantile Exchange (NYMEX). Silver surged to new highs at $16.87.
Both have seen profit taking and have since sold off in Asian and European trading. A monthly close above $900 tomorrow, the first ever, would obviously be very bullish from a technical point of view.
Negative real interest rates (with the key discount rate less than the rate of inflation) in the world’s largest economy is very inflationary and could lead to gold reaching $1,000 in the coming weeks, as the dollar comes under further pressure. The moniker ‘Helicopter Bernanke’ is looking more and more apposite as the Federal Reserve chairman again drops copious amounts of liquidity onto the increasingly troubled financial and economic waters. The risk is that by attempting to prevent deflation in asset classes, the Federal Reserve ends up creating stagflation and a mild form of hyperinflation. Or even worse by endeavoring to protect the banks, stock and property markets they end up putting the dollar’s position as the global reserve currency at risk.
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