Gold shot higher to recover and beat Wednesday's peak above $662 per ounce after the Federal Reserve chose to keep US interest rates on hold.

The news only sent gold higher for US Dollar investors, however.

Versus the Euro, Sterling and Yen, the metal was little changed for the day. The Dollar sank to a two-year low versus the Euro.

"The Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected," said today's short note from the Fed.

But unlike the last five "no change" decisions, all talk of further tightening was removed.

"The Fed dropped the tightening bias," notes Richard Vullo, head of forex sales in New York for Fortis.

"The market took it as dovish. That's negative for the Dollar."

Why move to ease lending rates? The crisis amongst America's subprime lenders continues to leak into the mainstream mortgage market.

Overdue payments on all types of loans rose to nearly 5% at the end of last year according to Doug Duncan, chief economist at the Mortgage Bankers Association.

That's almost half-a-percent higher than the previous 3-year average.

But rather than take default properties into repossession, many lenders are now urging delinquent borrowers to sell their homes at a discount – and repay what they can.

"Banks don't want to be real estate managers," says Duncan.

"The fact that delinquencies are rising means we're going to see more [of these] pre-foreclosure sales."

What else might US mortgage lenders do to fix the subprime market? Click here for more...

Looking further ahead, Drew Matus at Lehman Bros. told Bloomberg earlier that the Fed may now leave US rates on hold until the end of 2007.

Bill Gross of Pimco – the world's largest bond fund manager – also thinks the Fed will stall before cutting rates.

Gross thinks lower rates are needed to help stem defaults in the mortgage market and stave off recession.

But for now, the Fed will stick at 5.25% he thinks – defying the bond market's own forecasts.

Options traded at the CBOT in Chicago today put a 24% chance on Fed rates falling three times this year to 4.50%.

In the futures market, prices of Fed Funds futures predict US rates of 4.75% by year-end. That's exactly where a Bloomberg survey of 73 economists put the median forecast last week.

When that happens, "the safest place for investors will be in the short-end of the [yield] curve," says Gross – where bond prices will rise fastest as US rates fall.

Inflation is still a risk, however. Only today, the head of the European Central Bank warned that rising wage claims in the Eurozone are likely to force higher rates on the Euro.

The United Kingdom, meantime, is now suffering the fastest rising cost of living in 16 years. It has the worst rate of inflation in Western Europe, and is verging on the "Balkan inflation" of Greece and Bulgaria.

Back in Washington, the Fed is already "accommodative" with its lending rates, even though the gap between Dollar interest rates and official consumer price inflation has widened since the Fed began tightening at the end of 2004.

But minus the "hedonic" adjustments used to push the headline rate of inflation lower, the real rate of interest in the US stands just shy of zero today.

Now the Fed has ended its failed "tightening bias" – and the prospect of lower Dollar rates looks assured.

What will that mean for gold investors everywhere?

Click here to read more...