Gold rose again yesterday and the dollar fell sharply in anticipation of the Federal Reserve further slashing interest rates to record lows of 0.5% today.
In a desperate bid to prevent a recession deepening, the Federal Reserve is prepared to slash interest rates to an all-time low near 0% today. With ZIRP (zero interest rate) policies, the US and global economy and monetary system is entering unchartered territory which is leading to continuing safe haven demand for gold. 2009 looks set to be another very uncertain and turbulent year and the largest financial crisis since the 1930s continues to impact the global economy.
The monstrous credit and debt bubble in the United States (and the UK and Ireland), through years of cheap money policies by the Federal Reserve and irresponsible lending policies by banks, has created a bloated economy with an array of horrible and massive dislocations and imbalances that make a sustained recovery extremely difficult. The notion that more of the same failed policies will cure the imbalances is wrong headed. Debt driven consumerism got us into this mess and will not get us out. Rather prudent saving, investment and allocation of capital to export and employment creating enterprises will be needed in order to get the American and western economies back on their feet again.
Savers internationally continue to be penalised as real negative interest rates deepen. Inflation has fallen very recently but not nearly as sharply as interest rates. This is leading to a flight to the safety of gold as seen in rising premiums, delays in delivery and bullion coin and bar rationing, shortages and unavailability. Gold has less or no counterparty risk and in an era where return of capital is more important than return of capital, this is gold’s crucial quality.
The great argument against gold was that it did not yield anything. Increasingly, government and corporate bonds and deposit accounts yield next to nothing and savers also have the additional headache of counterparty risk.
The gold bull market will likely only end when interest rates in the US and internationally rise in the coming years to levels that will induce savers to increase their savings rate and will restore confidence in fiat currencies. This is how the 1970s bull market ended when Paul Volcker, the ex Federal Reserve Chairman increased interest rates to nearly 20%. As interest rates went up so did the gold price and it was only at the end of the interest rate tightening cycle with rates nearly at 20% that inflation was contained and investors began to sell gold and return to cash deposits and the safety of very high yielding US government bonds.