Gold Price Hits $1,780, Awaits the Fed, Bernanke

GOLD PRICE NEWS – The gold price touched a new all-time high of $1,780 per ounce early Tuesday morning.  The price of gold, currently trading at $1,745 per ounce, gained as much as $117 over the past two days alone.  S&P’s downgrade of the United States, combined with the flare-up of the sovereign debt crisis in Europe, has lit a fire under the yellow metal.  Confidence in the integrity of paper currencies has eroded, leading investors to bid up gold prices to record highs.

The Federal Open Market Committee (FOMC) meets today and will deliver its policy statement at 2:15pm eastern time.  With global markets experiencing severe turbulence in recent days, many are looking to Fed Chairman Ben Bernanke to stem the decline in global stock markets by announcing a new round of quantitative easing.  Gold prices have been bolstered by the Fed’s proclivity to print money in order to spark an economic recovery. News over the weekend that the European Central Bank (ECB) was set to begin purchasing Italian and Spanish bonds helped fuel the gold price rally.

Today’s surge in the gold price follows yesterday’s $55.00 per ounce spike.  The spot price of gold surpassed $1,700 per ounce for the first time ever on its way to new record highs.  Goldman Sachs called for gold to rise to $1,860 per ounce within 12 months, while JP Morgan predicted that gold prices could touch $2,500 per ounce this year.

Silver fell over 2% to $37.95 per ounce early this morning despite the rally in the price of gold.  As for precious metals equities traded higher Tuesday morning, Gold Fields (GFI), Kinross Gold (KGC), and Newmont Mining (NEM), which dropped 1.0%, 2.2%, and 0.5%, respectively, during yesterday’s trading session, all moved to the upside.

Although gold stocks finished lower yesterday, the sector significantly outperformed the broader market indices.  The Dow Jones Industrial Average (DJIA) plummeted 634.76 points, or 5.6%, to 10,809.85 – its largest single-day decline since December 1, 2008.  Risk aversion surged, as the CBOE Volatility Index (VIX) climbed 50% to 48.00, its highest level since May 21, 2010.

Commenting on the outlook for the gold price amid the market turmoil, David Rosenberg, chief economist and strategist at Gluskin Sheff, wrote in a note to clients “Expect gold to go much, much higher as well — just to get back to prior highs in inflation-adjusted terms would mean a test of $2,300; and normalizing by world money supply points to $3,000 an ounce.”

In an interview with CNBC, Kyle Bass, Managing Partner of Hayman Capital Management, stated that “When you understand the mechanisms of this European Financial Stability Facility, today it has 440 billion euros in lending capacity. They have to raise 780 billion euros in debt to fund this.”

Bass went on to note that total global credit market debt to GDP is higher than it was three years ago, despite the financial crisis of 2008.  This comment echoed ones that Bass made earlier this year, when he pointed out that since 2002, global credit has grown at an annualized rate of approximately 11% while real GDP has grown at 4%.

“Credit growth has outstripped real GDP growth by an astounding 275%,” he stated.  “We believe that debt will matter like it has every time since the dawn of financial history. Without a resolution of this global debt burden, systemic risk will fester and grow.”

In light of Bass’ comments, it is no surprise that the gold price has increased substantially alongside global credit growth since 2002.  As central banks continue resorting to currency debasement to fuel economic growth, investment demand has soared for the one form of money that cannot be hypothecated via a printing press.  If Bass’ forecast that “systemic risk will fester and grow” materializes further, the fundamental backdrop for the gold price will remain favorable for quite some time.