Gold News

Gold soars to $725 as Fed slashes rates, kills confidence in the Dollar

Spot Gold Prices soared 1.5% from their lows of the session to a new 16-month high above $725 per ounce on Tuesday after the US Federal Reserve slashed its key interest rate by 50-basis points.

Intending "to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets," the Fed's first cut in its main US interest rate takes the cost of borrowing Dollars to 4.75%.

Wall Street stocks also rose sharply, adding 1.8% to the Dow Jones index inside 45 minutes. "We see more cuts ahead," says David M.Jones of DMJ Advisors in Denver, a former Fed economist. "They have to rebuild confidence, both in terms of lenders and Main Street."

But the dash towards using cheap money to avoid a housing-led recession knocked confidence out of the US currency itself, with the Dollar promptly sinking to a new all-time low versus the European single currency.

The Euro's surge above $1.3970 capped the Euro Price of Gold, but it still shot higher to recover the day's earlier highs, just shy of a 16-month high, at €520 per ounce. French and German investors wanting to Buy Gold have now seen the metal gain 7% over the last month.

The British Pound also leapt more than a cent on the Fed's decision, touching a three-session high of $2.0150 after the UK government had earlier calmed London banking investors by promising to underwrite all deposits held by savers at Northern Rock, the struggling mortgage lender.

That failed to stop the Sterling Price of Gold rising sharply towards its own 16-month high, hit above £362 per ounce earlier in the day.

In the US Treasury market, two-year bonds rose after slipping for six days as traders' hopes or lower Fed rates were finally confirmed. But 10-year US bond prices fell, pushing the yield to 4.51% in late New York trade.

Bloomerg attributes the selling of longer-dated Dollar bonds to the Fed saying in its accompanying statement that inflation remains a risk further out.

But might Dollar bond holders instead fear the impact on their investments of the new inflation sanctioned by the US central bank today? To get the full story now, click here and read on...

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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