, IncFebruary 23, 2010 – Gold prices dropped in reaction to the Federal Reserve announcement of an increase in the discount rate it charges banks. While this news was not unexpected, it is seen as the first of a series of moves by the Fed to fight against mounting inflationary pressures by absorbing some of the excess money supply that has been introduced during the government’s stimulus spending.
At 4:00 PM EST today, gold prices stood at $1,110.50, down $3.10 for the day. Analysts believe that the rate hike coupled with the public gold sale announced by the International Monetary Fund are pressuring gold prices, leading investors to take profits before a price drop can occur.
The rate hike was seen as an effort by the Fed to influence public opinion on plans to control inflation, as very little money is actually lent to banks using this discount rate. The general concern at the Fed appears to be more geared towards taking small, initial steps before what some have called the “great money draining” takes place.
While the actions by the IMF and the Fed may initially cause a dip in gold prices, the long-term effect could be beneficial for gold. Concerning inflation, Fed Chairman Ben Bernanke recently said in a statement before the US House of Representatives, “We are quite confident that we can raise interest rates, reduce the money supply and do that all in a timely way to avoid any inflationary consequences.”
Interest rates have sat at zero for an overextended period, and the imminent raising of the key lending rate will play on the value of the dollar, whether Mr. Bernanke likes it or not. Gold is the traditional investment hedge against rising inflation, and investors should consider taking new positions prior to any increases in gold prices. While the discount rate hike shook prices, the long-term outlook could still be viewed as very positive for gold.
Ronald Stevens
Senior Staff Writer - GoldPrice.net
