Gold Price Held to Ransom by Interest Rates

By: Miles_Banner

It’s all gone wrong. The momentum has stopped. Gold’s run has been stunted. Now we need to work out if this is a short term top or a more permanent feature.

Gold looks very pivotal right now. All eyes are on the direction of the dollar. Any hints of interest rate rises will induce a bullish dollar sentiment which would in effect result in a lower gold price. Because of today’s uncertainty the gold price is being held to ransom by speculators reacting to news and data.

Investor sentiment can turn quickly and have severe consequences. After the 1980 spike gold dropped from its top of $850 to near $500 in less than 2 months. At that time interest rates were running rampant and there was a lack of confidence that the dollar would survive. And today the dollar is still calling the shots.

One of the reasons for gold’s ascent over this decade is the value central banks and sovereign wealth funds have placed on it. Traditionally money has been backed by a certain amount of gold, much like an ETF today. Gold has inherited a value unlike any other commodity. Its’ value is not derived from what you can do with it… there’s not much you can. In fact much of the gold ever mined sits in vaults rarely touched.

It’s because it is an alternative to fiat money that gold is valuable. This is the sole reason for its’ recent climb. Over the last decade gold’s assent is really a reflection of the decline in confidence of currencies across the world.

We’ve mentioned before China’s 2 trillion dollar surplus in foreign reserves, we’ve seen central banks from around the world diversifying and buying into gold as an alternative. And it’s this support that, in our opinion will keep the value of gold climbing higher.

Central banks have been banking on the dollar and now they’re all trying to lessen the impact of its devaluation. It’s the equivalent of putting all your eggs in one basket and finding it has a hole inside.

This week all eyes were on the US to see how the Federal Reserve were going to deal with the fiscal stimulus the central bank had pumped into the system. Any wording that gave signs of higher interest rates would determine the outlook for the US dollar and the price of gold. In fact this never came. The Fed’s will be keeping interest rates low for "an extended period" they announced yesterday.

Interest rates will be kept low because of the huge amount of government debt… it’s not feasible yet to hike interest on the huge volume of debt still in the system.

The brief dollar rally which has unravelled over the past few days has given investors new optimism in the dollar. But this optimism is misplaced. Nothing has changed, there’s still a huge amount of US debt. The reason behind its rally has more to do with the problems of other currencies in the wake of Dubai. Greece, Ireland and the Austrian bank problems have all surfaced and these could be just the start.

We shouldn’t mistake this rally for core strength in the dollar. It still has a long way to go before it looks stable. The dollar has become a safe haven to investors around the world as other currencies struggle but it’s a reaction rather than faith in the dollar that spurs this rally.
We remain bullish on gold in the long term, this recent decline in price has shaken off some speculators, and we’ll look to see if China or other central banks now look to acquire.

Regards,

Digger
Gold Price Today

P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (http://goldpricetoday.co.uk).

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