Gold bars are pictured at the Ginza Tanaka store in Tokyo in this file photo.Issei Kato/Reuters
The Fed's indecision on monetary stimulus is making big winners out of precious metals investors.
This chart explains Wednesday's sharp $53 (U.S.) move higher in gold prices. Historically, gold moves in the opposite direction of U.S. real (inflation-adjusted) interest rates. (I explained why this is the case here).
The Fed's backtracking on tapering caused an immediate rally in the bond market which reduced real yields. True to form, gold rallied.
The post-Fed bullion rally yesterday was predictable and, to some extent, so is today's more subdued 0.5 per cent gain. Precious metals investors will be more tentative as they attempt to guess at the Fed's future intentions. If stimulus withdrawal is merely delayed, the gains in gold may be short lived.
Reading the Fed tea leaves isn't easy at the best of times, and the expected appointment of Ben Bernanke's replacement makes it even more difficult. Each of the candidates for Fed chair will have their own strategy for dealing with monetary policy.
The U.S. Treasury market should be the best indicator for gold investors in the weeks ahead. Lower yields, particularly lower real yields, will likely translate into higher gold prices. Higher yields, whether they result solely from Fed-related concerns or from a strengthening economy, will push gold prices lower.
Scott Barlow