Will Gold plunge thanks to Fed’s $300b injection?

March 20, 2009

Commodity Online
NEW DELHI: There is no need to wax eloquent on Americans’ selfish mentality. There were enough proof to expose them before the world his week.

First thing was the case of AIG, which after taking the benefit of the bailout package, distributed bonus among the staff. This has even invited the wrath of President Barack Obama, who said action will be taken against AIG for doing such a selfish act. In fact blogs screamed: It is not AIG but it is a P.I.G. Act.

As if this was not enough on Wednesday America and the world witnessed a new phenomenon from the investors.

On March 18 evening after the markets were closed, US Federal Reserve announced that it would buy $300-billion of long-term Treasury Bills. Within minutes, price of gold contracts for April delivery jumped by almost 6 per cent from $888.70 an ounce to $940.10.

The jump was in after-hours trading. Gold price for April delivery was down $27.70, or 3 per cent, to settle at $889.10 per ounce. However, in the electric trading time after trading floor closed, the precious metal soared to as high as $954, more than $70 away from the intraday and 2-month lowest level of $882.70.

The Fed decision is considered to create more money to buy national debt, which means accelerating the inflation and weighs on the dollar. The dollar index was down nearly 3 per cent and the dollar rate versus euro dropped sharply to a 2-month low.

The recovery of gold’s safe-haven appeal helped the precious metal amazingly surge almost $60 in only two hours during the electric trading time.

Investors were fearful the Fed’s purchases would further push down interest rates, leading to further weakening of the dollar.

Whether the mid-week jump will be sustained when markets have absorbed the full, longer-term implications of the Fed’s move — injecting more liquidity into the banking system to prime the real economy’s pumps — remains to be seen.

The Fed is targeting an additional trillion dollar injection into the nation’s money supply by purchasing mortgage-backed securities. But the planned purchase of Treasuries took markets by surprise.

Fundamentally, the gold market had been consolidating, moving fairly sedately from last year’s $1030 price peak. However, while pouring trillions into world economies might be a correct approach to head off recession. It also exposes us to the risk of the sort of inflation we endured in the 1970s and 1980s.

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