Gold News

Gold Dips Before Fed Decision; "Real Physical Gold" Your Only Insurance Against Falling Interest Rates

Gold Prices recovered an early dip in the New York session on Wednesday in increasingly volatile trade ahead of today's interest-rate announcement from the US Federal Reserve.

The Gold Market bounced from a two-day low of $916.50 per ounce after a surprise US jobs report jarred with the slowest economic growth reported since 2002.

US equities slipped 0.3% lower by lunchtime, while European stock market closed the day 0.7% down.

"It's going to be difficult to sustain these record levels in gold," reckons Frank McGhee, head of metals trading at Integrated Brokerage Services in Chicago.

"If the Fed cut by a quarter, gold is going down. There's already a lot of stimulus in the economy. If they cut by a half, then they're saying this economy is dead in the water."

Interest-rate futures continued to point to a 0.5% cut in early trade Wednesday, supported by this morning's poor GDP data.

Spending on new-home building sank by 24% in the last three months of 2007, the Commerce Dept. said just before the Wall Street open, pulling GDP growth down to just 0.6%.

Price inflation also weighed on America's economy, rising 3.8% across the fourth-quarter.

But the Dollar briefly rallied – and Gold Prices dipped to a two-day low – on news that US employment rose by 130,000 this month, according to the ADP review of private-sector payrolls.

Large companies continued to shed jobs, as did the manufacturing and construction sectors, but Treasury bonds continued to tick lower on the news, pushing the yield on 10-year US government bonds two points higher to 3.70%.

The 10-year yield has now risen by more than 0.40% since last Friday's four-and-a-half year low, Bloomberg reports, "on speculation the Fed's rate cuts since September will support the economy."

But "another 50 basis points Fed cut would mean that your interest rates are below the inflation number," noted Jorg Kiener, head of Swiss Asia Capital, to CNBC earlier today, "and that would really move gold out of the starting blocks.

"The short positions are in earnest, now worth almost half-a-year's production [in gold futures], and they must start feeling the pinch in an environment of rising Gold Prices.

"I would expect some of these people to start closing their positions now, and that will move the price significantly higher."

Ahead of the Fed's decision, "money in the bank is becoming basically worthless," Kiener said, adding that "the only real asset that's considered money is precious metals.

"I think the insurance value in your portfolio should be real physical gold. Take it out of the banking system, and put some five to ten per cent of your portfolio in physical gold bullion."

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Adrian Ash

Adrian Ash, BullionVault Gold News

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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