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Gold Hits All-Time Highs After Bernanke Comments On Stimulus

(Kitco News) - The Federal Reserve has indicated for the second day in a row that further stimulus measures are possible to help jump-start the U.S. economy, propelling gold to an all-time high.

The Fed has not actually announced any new measures and is still monitoring the economy to see whether they are even necessary. But for now, the gold market is factoring in further debasement of the U.S. dollar, analysts said.

News that the Fed is at least thinking about further stimulus comes at a time when the yellow metal is already underpinned by European debt issues and political deadlock in the U.S. on raising the debt ceiling ahead of an early-August target to avoid a default.

August gold has peaked so far Wednesday at $1,588.70 an ounce on the Comex division of the New York Mercantile Exchange, a record for a most-active contract. As of 1:08 p.m. EDT, it was up $23.10, or 1.5%, to $1,585.40 an ounce. Spot gold was $18.60 higher at $1,585.90 an ounce.

The next obvious target for the market is the next big round number of $1,600 an ounce.

“The way we’ve been trading the last couple of days, we (could be) five minutes away,” said Mike Daly, gold and silver specialist with PFGBEST.

The Fed last month said that it was not embarking upon a third round of purchases of Treasury securities in a move to push down long-term yields, referred to as quantitative easing. The second round of QE ended June 30. However, minutes of the June 21-22 meeting of the FOMC, released Tuesday afternoon, showed that a minority is at least considering further action.

Then in congressional testimony Wednesday morning, Federal Reserve Chairman Ben Bernanke in essence confirmed that policy-makers are considering more easing. He said economic weakness may be more persistent than expected, “implying a need for additional policy support.” He also said the Fed is contemplating several “untested” steps to revive the economy.

Thus, markets went from thinking not long ago there would be no further stimulus to now thinking there very well may be, Daly said.

“It’s called many things, but any form of printing of money is obviously dilutive of the dollar, and that’s obviously good for gold,” said Jeff Clark, precious-metals analyst with Casey Research. “That’s the primary reason why gold is moving.”

Of course, the Fed has not embarked upon further stimulus yet. Time will tell whether it happens.

“But there is an obvious indication they are contemplating it. Let’s put it that way,” Clark said. He later added: “The markets are interpreting that as they likely will. And therefore, gold is up.”

Not only is gold up and the dollar down, but the Dow Jones Industrial Average is around 120 points higher on the prospects for more stimulus measures.

Any further easing also adds to worries about inflation, said Daly and George Gero, vice president with RBC Capital Markets Global Futures. Already, China is trying to contain inflation fueled in part by high commodity prices, Daly added.

Mark Johnson, portfolio co-manager with the USAA Precious Metals and Minerals Fund, pointed out that the FOMC minutes released Tuesday left the door open for the Fed to either loosen or tighten policy down the road. Policy-makers have given themselves considerable flexibility, he suggested.

“I think you have to look beyond the statements at the underlying conditions,” he said. “And the underlying economic conditions would basically argue there is going to be no tightening any time soon.”

This implies continued negative real interest rates, which in turn debases the dollar and creates a favorable environment for gold, he said.

“If you couple that with the continued deterioration of the sovereign-debt issues in Europe, you’ve got another driver for gold, as people continue to question the long-term viability of the euro,” Johnson said.

European finance officials have been providing bailout loans while encouraging troubled nations to undertake austerity measures. Analysts often describe the net effect as “kicking the can down the road,” since countries are in essence borrowing money to meet debt obligations.

“They continue to kick the can down the road, but the can is getting bigger and heavier,” Johnson said. “At some point when they kick it, they are going to break their feet.”

Meanwhile, Daly said, the market is only a month or two from the period when it tends to draw seasonal support from gift-giving holidays. A number of important holidays occur in autumn in India, a significant gold consumer, followed by the Christmas season in Western nations.

The buying is accelerating on technical chart factors, Gero said.

“It looks like we’re just off to the races,” he said. “The Bernanke remarks are playing a role in getting both the technical traders and fundamental traders involved.”

The most recent FOMC developments are bullish for gold in both the short and long term, Clark said. But “that doesn’t mean it’s going to be a straight line up,” he added.

He and Johnson said whenever Washington finally reaches an agreement on the debt ceiling, the metal will probably dip. “Any time you take a risk factor of the table, you would expect gold to soften,” Johnson said. Still, he and Clark said this is likely to be only a temporary setback.

“That won’t solve our structural debt, deficit and money-printing problems,” Clark said. “So in the long term, this is nothing but positive for gold.”