Gold News & Info

Source: Dr. Bill Musgrave, American Gold Exchange

Austin— Gold tumbled 3.5% and silver 6.7% as the Fed-inspired sell-off of risk assets continued. Equities and commodities extended their losses and the dollar rose sharply after minutes from the March FOMC meeting, released yesterday, showed little support for another round of quantitative easing unless economic conditions deteriorate. The news is forcing traders to reassess their positions in a risk rally that has been supported by a flood of cheap dollars. Also contributing to today's sell off was a weaker-than-expected debt auction in Spain, which raised fears that the eurozone debt crisis might intensify and undermine the global recovery. It was gold's lowest close since January 9, and silver's lowest since January 19. Platinum declined $3.7% and palladium 4.1%.

At the close: June gold fell $57.90 to $1,614.10; May silver plunged $2.22 to $31.04; July platinum lost $61.90 to $1,598.60; June palladium dropped $26.85 to $632.75 an ounce.

Although gold typically serves as a safe haven asset with low correlation to risk assets like equities, in recent months it's been trading more as a traditional commodity, buoyed by a weak dollar and prospects for global growth. In coming months, gold could well continue its recent correlation with risk, whether or not more easing comes from the Fed. After all, the economy is already awash in more than $2 trillion in cheap dollars from QE1 and QE2. But as Jeff Clark of Casey Research pointed out yesterday, the main driver of the current bull market in gold has little to do with risk assets and is still very much in place: negative real interest rates. As long as nominal interest rates remain below the rate of inflation, gold is an attractive store of wealth and its bull market will continue.

In Clark's words: " When real interest rates are at or below zero, cash or debt instruments (like bonds) cease being effective because the return is lower than inflation. In these cases, the investment is actually losing purchasing power � regardless of what the investment pays. An investor's interest thus shifts to assets that offer returns above inflation� or at least a vehicle where money doesn't lose value. Gold is one of the most reliable and proven tools in this scenario."

The most recent CPI shows annual inflation running at 2.9%. The Fed's commitment to zero interest rates through late 2014 combined with the inflation-inducing liquidity they've already released into the economy by QE1 and QE2 all but guarantee that real interest rates will remain negative for a long time to come. So gold's current sell off, while sobering, detracts little from its long-term prospects as a safe-haven store of wealth, and should do little to interrupt its bull market.