Lear Capital: Is FED Gold’s New BFF

2010_01_05_17_53_260001With gold now trading at or below its reported all-in cost of production, its current low price is tenuous at best.  There really exists no more reason for gold to go any lower.  Even if China forgave a couple trillion dollars of debt and sent the dollar skyrocketing, it doesn’t change the fact that now, in the case of some mines, the gold price is lower than the cost of production.

This alone could ultimately drive the gold price higher.  If mines were forced to shut down due to negative productivity, the gold supply would take a hit and prices would rise again.  In fact, one announcement of a shut-down from a gold miner could blow this whole gold correction right out of the water.

If gold is truly now selling at such prices, any number of events could trigger a significant move higher in the spot price.  At this moment, a few words from the Wizard (Ben Bernanke) seem to be that trigger.  As the Chairman hinted at the potential for further accommodative measures, the dollar dropped and gold made a noticeable move higher.

I have always believed, while the world may love a strong dollar, the Fed loves a weak dollar.  A weak dollar boosts the profitability of our exports, which is good for the markets.  And, money borrowed today is always easier to pay back with future dollars that are worth less.  Frankly, now is not a bad time to be in debt or go in debt … Unless you think rates can go lower and inflation can’t go higher.  Hmmm! Say it isn’t so.

Does $1260 gold now mean $1360 gold is right around the corner?  Probably not, so there’s still time to get in on sale days at the gold market.  What it does mean is that gold and the Fed have made up.  All this talk of a taper caper has turned to whispered denials and the Fed may have once again, become gold’s BFF.



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