Fed loses "patience" and gold skyrockets

Gold rose sharply following yesterday’s Fed announcement in which it was indicated that the Fed are unlikely to raise rates in June – although the possibility was not ruled out – due to the poorer economic data that has been emerging this year.

Gold rose after Fed Chair Yellen said that economic growth had “moderated somewhat” which means that ultra loose monetary policies look set to continue. The Federal Reserve dropped the word “patience” from its policy statement, stoking expectations for a mid-year rise in U.S. interest rates.

Many analysts regard this as further evidence that the Fed is caught in a bind. It needs to tighten monetary policy in order to rein in the developing bubbles in stock, bond and certain property markets. Stocks are seeing “irrational exuberance” once again and valuations surging despite declining earnings and dividends. Earnings and dividends are not likely to be improved given the weak economic data emerging from the U.S..

On the other hand, raising rates could cause the dollar to surge even higher in the short term, further undermining U.S. exports and the jobs market with a knock-on effect on consumer confidence.

What is yet to be appreciated by most analysts is that it is unlikely that the massively over-leveraged and debt saturated financial system can weather increases in interest rates.

Global debt has ballooned since the 2008 crisis – itself a product of gargantuan debt. If consumers, investors, banks and other financial institutions are forced to service their debts at higher interest rates it will likely cause a new debt crisis and contagion.

Most likely the Fed will continue suggesting an imminent rate hike while plodding along as long as it can. But at some point rates will rise or the Fed will be overwhelmed when it finally becomes clear that they are reacting to events and are no longer in control of monetary policy.

Meanwhile, the dollar’s status as the world’s reserve currency continues to be undermined. Now, even its U.K. and European allies are beginning to adapt a more international approach to monetary affairs and not slavishly following Washington’s diktats.

Britain recently joined China in establishing a new infrastructure bank – the Asian Infrastructure Investment Bank (AIIB) – and is now being joined by France, Germany and Italy.

This new bank – which along with the BRICS bank will rival the U.S. dominated IMF and World Bank system – will not lend exclusively in dollars and will likely undermine the status of the dollar as sole reserve currency.

There has been much negative comment of gold in the financial sphere despite the fact that gold has been protecting investors in the Euro zone and in terms of other currencies gold has seen slight losses or has been thriving.

In dollar terms gold is marginally lower in the past year. Most currencies are lower than the dollar this year. But the undue status of the dollar as safe haven reserve currency is growing more questionable as we move from a uni-polar U.S. dominated world to a multi-polar world with an increasingly powerful China, India and Asia.

A new international currency order is emerging and we believe that certain countries, such as Russia and China, will bring back some form of quasi gold standard, using gold as backing, in order to bolster confidence in fiat currencies.

Gold will almost certainly be a foundation stone in a new international monetary system. Therefore, we expect it to be revalued to much higher levels in the coming years in dollar and all currency terms.

About the Author

Mark O'Byrne is executive director of Ireland-based GoldCore.