Gold News

Gold Hits New Record High as Fed Slashes Dollar Rates; Lone Dissenter Warns of Inflation from Asia

Gold Prices jumped 1.2% on Wednesday to record new all-time record highs above $933 per ounce after the Federal Reserve voted to cut US interest rates yet again, barely one week after the sharpest "emergency" rate-cut in two decades.

Noting "considerable stress" in the financial markets, plus tighter credit for consumers and a "deepening of the housing contraction", the Federal Open Market Committee voted 9-to-1 to cut another 0.5% off the rewards paid to US cash-holders.

That took the Fed funds rate to a 30-month low of 3.0%. After inflation, the real rate of US interest now stands at minus 1.1% per year based on Dec.'s consumer price index.

Wall Street stocks spiked on the news, with the Dow adding more than 100 points inside 20 minutes. The Euro shot to a new two-week high of $1.4885, but that failed to stop the Gold Price in Euros recovering its overnight highs of €626 per ounce.

Going into the Fed's decision, the British Pound had dropped half-a-cent from the new one-month highs it reached this morning when Mervyn King – the hawkish head of the Bank of England – was re-appointed for another five-year term by the UK government.

Even with the BoE expected to cut Sterling interest rates in response to the UK's own deepening house-price slump next week, the British Pound now pays 225 basis points above Dollars – and the Fed's decision sent it back to the day's top of $1.9945.

The bid for gold was so much stronger, however, that the Gold Price in Sterling shot more than 1% higher to reach its own record high of £468 per ounce.

"Money in the bank is becoming basically worthless," said Jorg Kiener, head of Swiss Asia Capital, to CNBC ahead of the Fed's decision, 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," he advised.

Not voting for the FOMC today was Bill Poole, head of the St.Louis Fed who voted against last week's extraordinary 0.75% cut, preferring to wait until today's scheduled announcement.

Poole was already set to leave the FOMC in this month's annual rotation, however, and his replacement on the committee – "arch hawk" Charles Plosser of the Philadelphia Fed – chose to vote with chairman Ben Bernanke for lower rates today.

The only dissenter was Richard W. Fisher, head of the Dallas Fed. He may also have argued against the Fed's accompanying statement.

"The Committee expects inflation to moderate in coming quarters," the FOMC announced in its press release of 14:15 EST. But less than two weeks ago, "the growing appetite for raw inputs from the new participants in the global economy represents an inflationary headwind that is unlikely to soon abate," Fisher warned in a speech.

"Income growth in China and India and elsewhere, even if it slows from its torrid pace, is likely to continue raising demand for food and energy."

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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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