Gold futures rose above US$800 an ounce today for the first time since 1980, following the US Federal Reserve's decision to lower interest rates by 25 basis points to 4.5% overnight. The interest rate cut came despite reports that the US economy grew at an annual rate of 3.9% in the third quarter. The Fed is clearly targeting the housing market, and more specifically Wall Street's exposure to it.
In the past few weeks, Wall Street investment banks have written off billions of dollars in mortgage related debt. With more pain to come, these investment banks are screaming for lower interest rates. And the Fed is delivering, with little regard for the value of the dollar.
Hence the rise in the gold price. Investors are fleeing the dollar as the prospect of lower nominal returns (lower interest rates) make holding the currency less attractive relative to other assets. Although gold does not pay interest, its historical significance as a store of wealth is becoming increasingly attractive to global investors who have consistently lost money via the depreciation of the US dollar against a basket of currencies over the past few years.
With gold futures breaking through the US$800 barrier, gold stocks had a strong day on the ASX today. Lihir Gold finished 4.8 percent higher at $4.33, while Newcrest increased 4.6 percent to close at a record high of $33.9. Following the release of better than expected third quarter earnings in the US overnight, Newmont Mining also had a strong day, rising 6 percent to $5.42.
