GOLD PRICE NEWS - The gold price rallied $20 to $1,123 per ounce, moving higher ahead of today’s Federal Open Market Committee (FOMC) meeting. The price of gold has traded in a tight range over the past month, closing between $1,095 and $1,140. Currency markets have consolidated as well with the euro trading in the same place today, 1.37 versus the U.S. dollar, as it did in early February. Commodities such as oil and copper have traded along a similar path as that of the gold price and the U.S. dollar - as ebbing volatility has characterized recent trading activity. Despite undergoing the most hostile investment climate since the 1930s a short eighteen months ago, the fear that prevailed in 2008 and early 2009 has evaporated. Volatility indices such as the VIX are trading at pre-crisis levels, put-call ratios have shrunk, and sentiment surveys show pervasive bullishness among investment professionals. The gold price has underperformed more cyclical investments such as broader market stocks and commodities such as oil and copper over the past year. Support for asset markets from central bankers and the federal government has been unprecedented. Aggressive monetary and fiscal policies have been designed to reenergize a flailing consumer and kick-start private sector demand. While the torrent of liquidity has stabilized asset markets, household balance sheets remain tattered and demand for credit is still falling. Chairman Bernanke and the FOMC meet today and at 2:15pm eastern time will release their highly anticipated statement accompanying their decision on interest rates. While the fed funds benchmark rate will likely stay unchanged, there has been much debate as to whether the Fed will alter their “extended period of time” language referring to the committee’s intention of keeping rates low indefinitely. For gold investors, it is noteworthy that the current low level of real interest rates is one of the chief underpinnings of the rising gold price. The opportunity cost of holding a sterile asset that pays no rate on interest, such as gold, has been eliminated as money market funds offer a near-zero yield. Money in the bank at a zero interest rate with even mild price inflation loses its purchasing power on a daily basis. Investors have turned to gold as confidence in fiat currencies across the globe has declined. While there has been much ink spilt on exit strategies, there has been very little action with respect to normalizing monetary policy. Dovish officials, led by Chairman Bernanke, dominate the committee and exterminating deflation remains the chief focus of the Federal Reserve. Until this fact changes and the Fed’s focus shifts to the potential implications of the central banks’ $2 trillion balance sheet and perpetual $1 trillion plus budget deficits, the macro-economic backdrop for the gold price appears to be positive.

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