Federal Reserve Could Start A Gold Rush
Andrew Farrell, 08.20.07, 4:45 PM ET
The Federal Reserve is mulling a federal funds interest rate cut; a move that would buff the luster of gold miners.
Lower interest rates weaken the dollar and cause inflation, which both drive investors goldward. RBC analyst Stephen Walker says that gold equities have charted significant gains during 58.3% of rate cutting cycles by the Federal Reserve. They have only underperformed the U.S. equity markets in 25.0% of the cycles.
The Federal Reserve raised hopes last week of a lowered federal funds rate after slashing a secondary rate. On Friday, the Fed cut its discount rate by 50 basis points, to 5.75%, from 6.25%. Banks use the so-called discount window to borrow money directly from the Fed. (See: "The Fed Finds An Answer")
The slashed discount rate puts the federal funds rate next in line for a mowing. December fed funds futures trading on the Chicago Board of Trade rose Monday to 95.5, indicating futures traders are expecting rates to be cut to 4.50% from 5.25% by the end of this year.
At gold's current price, and with hope of a rate cut soon adding a boost, gold producers look attractively priced. Walker says that gold equities are currently trading at valuations as if gold were $605 to $615 per ounce. An ounce of gold trading on the New York Mercantile Exchange on Monday traded for $658.70 an ounce.
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