GOLD prices soared to a fresh record high last night after markets dismissed Ben Bernanke’s first ever press conference as too dovish on inflation.
The price of a troy ounce smashed through the $1,518.6 record set on Monday to a new high of $1,530.3 after the Fed chairman told reporters that the Federal Open Markets Committee (FOMC) “expects the effect of commodity prices on inflation to be transient” and added that the recent up-tick in prices was merely a “short-term increase in inflation”.
He added that the Fed was powerless to stop the main driver of rising prices: “There’s not much the Federal Reserve can do about gas prices… it can’t create more oil.” His remarks were seen to rule out any kind of monetary tightening in the near future.
However, he also ruled out an expansion of the Fed’s latest $600bn quantitative easing programme (QE II) and said that the first move to tightening would involve allowing bonds purchased under QE II to mature.
As Bernanke was speaking, dollar bears flocked into the yellow metal as a safer store of value than the greenback and the dollar fell one per cent to $1.4785 versus the euro, its lowest since December 2009. Meanwhile, the Nasdaq closed at a ten-year high of 2,869.88.
ING’s Rob Carnell said Bernanke’s benign view of inflation expectations “is stretching credulity a lot… the market no longer sees this as a near term inflation blip. The Fed seems to have a problem acknowledging reality”.
Confidence in the dollar was further knocked by Bernanke’s assertion that Washington’s $1.4 trillion spending deficit is “the most important economic problem in the long-term that the US faces”. “We have a fiscal deficit that’s not sustainable,” he said. “It will have significant effects for economic growth and standards of living.”
He welcomed ratings agency S&P’s decision to revise the US’s credit outlook to negative, saying: “To the extent that the S&P action goads a response [from politicians], I think that’s constructive.”
The Fed also downgraded its growth forecasts in ?minutes released shortly before Bernanke spoke, revising the estimate for 2011 down to 3.1-3.3 GDP per cent growth versus a 3.2-3.9 per cent forecast given in January.
The consensus among private sector economists is for 2.9 per cent growth, however. As with inflation, Bernanke said the growth slowdown was “transitory”, but warned: “We are digging ourselves out of a very, very deep hole.”