Precious Metals Benefit as Fed Decides to Keep Rates at Zero
Thursday, January 26, 2012
The Federal Reserve continues to try and inflate the U.S. economy with its unprecedented
easy money policies. Yesterday's FOMC decision to maintain its Zero Interest Rate
Policy (ZIRP) through LATE 2014 provides certainty to investors
that the Fed aims to apply steady downward pressure on the USD for the forseeable
future. As has been noted in the past, Europe and the U.S. currencies are currently
in a race to the bottom, and for the moment, the Fed has helped push the USD into
the lead. Indeed the EUR-USD rate continues to rebound from the lows hit in December,
rising above the 1.30 level. Predictably, investors of all stripes are viewing the
Fed's move as a signal to look for USD alternatives. Among the biggest winners are
gold and silver.
Gold has now climbed to a seven week high, while silver is now comfortably in the
$30 per troy ounce leve. Both metals are outperforming all other asset classes thus
far in 2012, with both metals sporting 10% gains. The attractiveness of precious
metals as an alternative to the USD has jumped since the Fed has now virtually guaranteed
that savings held at a bank will yield a negative return. Inflation over the last
12 months has averaged just over 2%, although the Fed prefers to look at inflation
ex-food and energy, which has been 1.7%. Either way you look at it, savers have
seen their purchasing power eroded by the Fed's policies.
Fed's Press Release Indicates Willingness to Do Even More to Weaken USD
The FOMC press release also indicated that "The Committee will regularly review
the size and composition of its securities holdings and is prepared to adjust those
holdings as appropriate to promote a stronger economic recovery in a contest of
price stability." A loose interpretation of this statement can be construed to indicate
that the Fed is setting the stage for another round of bond buying since "Strains
in global financial markets continue to pose significant downside risks to the economic
Expect any economic weakness in the U.S., or indeed even just a failure of the U.S.
employment rate to fall significantly, to raise the calls for more Fed action.
Next Major Monetary Event in the EUR-USD Race to the Bottom
The ECB is expected to hit the markets with up to 1 trillion EUR in cheap 1% bank
financing in its next Long Term Refinancing Operation (LTRO) on February 29th. The
first LTRO shoved 489 billion EUR into European banks. The printing of another 500
billion to 1 trillion of EUR will clearly weigh on the EUR. While market reaction
was initially mixed, the wake of the first LTRO saw markets reach a near-term bottom
in December, with gold and silver clearly benefitting from the unprecedented money
printing by the central bank across the Atlantic.
Search for Monetary Substitute Likely to Continue to Support Gold and Silver
One of the primary reasons investors are flocking to precious metals is the negative
interest rates now seen in the U.S. and Europe. The cost of holding precious metals
is diminished with inflation outpacing the return available on cash savings, increasing
the attractiveness of precious metals including gold and silver.
While yesterday's FOMC decision was somewhat surprising, it does continue the history
of Bernanke's Fed to aggresively try and inflate the U.S. out of its debt woes.
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Disclaimer: Gainesville Coins "Market Updates and In the News Section"
provide our readers with features and analysis of the financial markets, and some
of the factors that may be affecting market direction. While the information is
obtained from sources we believe to be reliable, we do not guarantee its accuracy
or its completeness, and this information should not be considered investment advice.
Gainesville Coins provides these articles for informational purposes only, and they
do not constitute a recommendation by Gainesville Coins to hold, to purchase, or
to sell any investment.