Investors Turning to Gold as Fed Hints at More Spending

Gold continued to flirt with Friday’s record price of $1,300 an ounce, and as of 1:30 pm on Monday, was trading at $1,298. US treasuries also traded higher with $36 billion of 2-year T-bills slated for auction Monday afternoon, with another $35 billion in 5-year bonds scheduled for Tuesday. On Wednesday, $29 billion in 7-year bonds are on the block.

Demand remains high for both gold and treasuries as investors fret over the prospect of a slowing economy. In it’s statement on September 21st, the Federal Open Market Committee (FOMC) made already jittery investors even more nervous with confirmation that it was prepared to intervene directly by implementing a new round of debt-buying should the pace of recovery not pick up during the second half of the year.

Naturally, another round of quantitative easing will add further to an already staggering deficit, but investors are more concerned with the more direct consequences of flooding the economy with “cheap” money. Chief amongst these concerns is a further devaluing of the US dollar which could lead to inflation and rising prices. This is the fear that is driving many to gold as they see this as the best option for “parking” wealth until the inflation picture comes more sharply into focus.

On the fixed income side of things, investors fearful of inflation cutting into yields are demanding better returns before purchasing treasuries and other bonds. Because t-bills are guaranteed by the government, they are amongst the safest of investments and some buyers will be happy simply to guarantee their principle.

So what we are seeing here, is a classic flight to safety. In an unusual twist however, it is not the US dollar investors are turning to as is common practice during times of uncertainty; indeed, it is the dollar that is contributing to much of the current uncertainty.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.