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Gold Firms as Age of Easy Money Continues

by Peter A. Grant

May 02, AM
(from USAGOLD.com) --

Gold rebounded on the heels of today's ECB rate cut, buoyed by the growing realization that the era of über-accommodative policy won't be ending any time soon. The ECB had been under mounting pressure to ease in the wake of a string of data disappointments that indicate the European economy is slowing further.

The euro sold off initially on the announcement, but quickly regained the 1.32 level against the dollar on the realization that a refi rate of 0.5% is still quite a bit higher than the 0.0%-0.25% Fed funds rate and the 0.1% BoJ policy rate. However, when ECB chief Mario Draghi mentioned that the governing council had an "open mind" with regard to a negative deposit rate (currently at 0%), the single currency quickly reversed course and fell below 1.31.

Yesterday the Fed held steady on policy, but a couple tweaks to the statement suggest that the Fed may still be a long way off from removing accommodations. In fact, the FOMC said they are just as prepared to increase the pace of asset purchases "as the outlook for the labor market or inflation changes."

Inflation remains subdued (by official measures), but like Europe, the U.S. has suffered a series of data disappointments that suggest the recovery may be stalling. Tomorrow's employment report for April should provide some clarity. If there is another downside miss, the notion of a phased withdrawal of accommodations may finally get shelved. On the other hand, if payrolls rebound significantly from the bleak March print, the debate will likely continue.

One thing is for certain, as central bank policies force down yields, it pushes investors out along the risk curve. Hence the rebound in stocks over the last several years, despite dubious fundamentals.

As more investors pile back into stocks in their quest for any kind of positive real yield, despite the risks and often with the hope of salvaging their retirement, the need for uncorrelated asset diversification becomes all the more important. That's were gold comes in. And not in the form of some security indexed to the price of gold, I'm talking real gold.

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Gold Firms as Age of Easy Money Continues