Central Bankers Weaken Their Currencies, Boost Gold

By Sam Mattera
Benzinga Guest Writer

Since the turn of the year, nearly every asset class has been on a tremendous bull run.

Precious metals in particular have benefited, as gold and silver have rallied back from their recent lows. Gone are calls for a “gold bubble”. Gold has risen in price throughout January and now sits near $1745 per ounce. Silver has gained as well, and is currently approaching $34 per ounce.

The precious metals may have been getting a boost from the actions of central bankers, who continue to make the yellow metal a seemingly great alternative currency.

Last week, in the Federal Reserve’s statement, the Federal Open Market Committee promised to extend low rates through 2014, and possibly into 2015. In August the Fed had promised to keep rates low until at least mid-2013. Now, the FOMC has extended that promise for at least an additional year.

In August, that rate pledge drew three dissenting votes from regional Fed presidents. However, as the FOMC’s membership shifts from year-to-year, those members no longer have a say in the FOMC’s decision.

Philadelphia Fed’s Charles Plosser —who dissented in August but now no longer has a vote—spoke on Wednesday and derided the move. He attacked it from a bullish perspective, continuing to state his long-standing opposition: that the economy is improving and low rates will not be appropriate for much longer. In that case, to prevent runaway inflation, the Fed would have to hike rates prior to their promised date.

While keeping rates low may contribute to economic growth in the short term, the move has begun to draw fire from some commentators and money managers.

In his monthly letter, Bill Gross—the world’s largest bond fund manager—attacked the move, stating that it could actually have a negative effect.

Ultimately, if the Fed keeps interest rates low, it could spur inflation as investors pile out of a weakening dollar in favor of precious metals. Under this scenario, investors may anticipate the US dollar index to fall while the price of gold may rally.

Still, as other central bankers continue to ease, the dollar index may not give much ground. The US dollar index is a measure of the dollar’s value against other fiat currencies.

Bank of England officials have mentioned undertaking further quantitative easing, while the European Central Bank continues to step into the European bond market from time to time. The Bank of Japan may attempt to weaken its yen once again, in the face of slumping Japanese manufacturing.

The US dollar index dropped 0.5% during early trading on Wednesday, as the EUR/USD pair moved up over 0.64%.

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