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Gold Rises As Fed Pledges Rate Hold Through 2014

Release Date: 
Thursday, January 26, 2012

The price of gold rose to a six-week high on Thursday after the Federal Reserve announced plans to hold interest rates at "exceptionally low" levels through the end of 2014. Gold traded at $1727.70 per ounce at 6:34 a.m. Pacific Time on the New York Spot Market with silver higher at $33.80 per ounce. Gold extended yesterday's gain which had its largest one-day rise in three months.

The Fed said that a further round of quantitative easing is possible if the economic recovery stalls. At a press conference following the Fed's announcement, Chairman Ben Bernanke stated the option of further large-scale bond purchases is still "on the table."

HSBC commented that "the addition of a new phrase in the statement in which the committee expects to maintain a highly accommodative monetary policy is a clear bias towards monetary easing," adding, "a highly accommodative monetary policy is bullish for gold."

"We saw an immediate reaction in gold [after the Fed's announcement]", noted Michael A. Gayed, chief investment strategist at New York-based Pension Partners LLC. "People are betting that at some point the economy will face inflationary pressures because of the low interest rate."

The Fed decision caused the dollar to fall while boosting equities, oil and other commodities. "Although the Fed's decision bolstered commodities prices across the board, the impact on precious metals prices has been the most apparent," wrote analysts at KBC Bank in Brussels. "Generally, [a] low real-interest-rates environment has been historically favorable for the price of gold. Therefore, prolonged period of stable low interest rates (perhaps through late 2014) could play in favor of the price of the yellow metal in months ahead," they said.

(Sources: "Gold extends post-Fed rally to 6-week high," MarketWatch, January 26, 2011; "PRECIOUS-Gold hits 6-1/2 week high as Fed boosts markets," Reuters, January 26, 2012; "Gold Surges to Six-Week High on Fed's Forecast for Low Borrowing Costs," Bloomberg, January 25, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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