There are a lot of market winners after the Federal Reserve announced a bold round of stimulus measures on Thursday afternoon, triggering a rally that grew stronger as the afternoon progressed. But gold and gold producers are among the biggest winners.
Gold jumped to $1,766 (U.S.) an ounce, up $35, hitting its highest level since February. The NYSE Arca Gold Bugs index of gold producers rose 4.1 per cent, marking its biggest one-day move in more than three months and hitting its highest level since March.
In Canada, the S&P/TSX composite index’s materials sector led the gains, rising 2.7 per cent – helped by the 2.8 per cent gain from Barrick Gold Corp. and the 3.8 per cent gain from Goldcorp Inc.
The question is, why? The Fed said in its policy statement that it would buy $40-billion of mortgage debt per month and extend its commitment to keeping its key interest rate at exceptionally low levels through mid-2015 – providing the fuel that has previously given gold a boost.
Some gold enthusiasts would point out that any central bank policy that involves printing money is good for gold, because the policy undermines the value of printed currency. But mostly this is about a fear of inflation: By injecting more money into the economy through another round of bond-buying, the concern is that the Fed is again feeding an inflationary engine – and gold is seen as a hedge against rising inflation.
The problem is, the Fed has been taking unusual steps to boost the U.S. economy for some time now, cutting its key interest rate to near-zero in December 2008 and announcing three rounds of quantatitive easing, not to mention other policy measures. Since then, the inflation rate has been low.
When the U.S. consumer price index for August is released on Friday, economists expect the headline rate to be 1.7 per cent, year over year, up only slightly from a July reading of 1.4 per cent. Strip out volatile food and energy items, and the core rate for August is expected to dip to 2 per cent, down from 2.1 per cent in July.
The Fed itself is clearly not worried about inflation. In its statement it said: “Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.”
Meanwhile, the bond market is similarly not worried about inflation. The yield on the 10-year U.S. Treasury bond is below 1.74 per cent, which is very, very low.Report Typo/Error