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.
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 outlook."
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.
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.
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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