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Gold Volatile Trading on Federal Reserve's Move to Monetize U.S. Debt

Commodities / Gold & Silver 2009 Mar 19, 2009 - 07:08 AM GMT

By: Mark_OByrne

Commodities Gold fell in US trading hours yesterday for no apparent reason but on the Fed announcement gold surged by nearly 7% in afterhours access trade. Gold leapt from its session low of $884.10/oz to a high of $946.20/oz, a jump of nearly 7 per cent and silver also surged some 7%. Gold subsequently gave up some of those gains but remains firm over $934/oz.


The Federal Reserve’s plan to buy billions of dollars worth of their own government bonds, agency debt and Treasuries in an unprecedented act of debt monetization valued in the low trillions saw a somewhat muted response from stock markets which rose somewhat (US markets were up between 1% and 2%) and commodities which were mixed with oil down after the announcement.

The Fed will print up to $300 billion to buy long-term government bonds and print an additional $850 billion to buy mortgage-backed securities issued by the discredited and now nationalised Fannie Mae and Freddie Mac ($1.15 Trillion in total).

The Federal Reserve’s plan is extremely high risk and astute observers are very concerned regarding the potential for very significant inflation in the coming months. This explains gold’s surge in value after the announcement.

The huge scale of the debt monetization is unprecedented and may lead other central banks to follow the Federal Reserve leading to competitive currency devaluations which could result in an international monetary or currency crisis. The Federal Reserve is creating trillions of dollars in order to buy their own US national debt which resembles the monetary policies of Third World banana republics and will likely lead to a severe depreciation in the dollar in the coming months. Talk of the dollar becoming confetti is hyperbole but the US authorities had better be careful that in their desperation to allay deflation they do not release the virulent forces of stagflation and even hyperinflation.

By Mark O'Byrne, Executive Director

Gold Investments
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Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

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