The FOMC Announcement and the Gold Market
Posted by Adam King on April 04, 2012
Currently the gold market is in a state of bewilderment as it copes with a series of mixed signals from the Federal Reserve. Four weeks ago, Fed Chairman Ben Bernanke appeared before Congress and tacitly delayed an expected round of Quantitative Easing. This is no surprise, particularly, as bankers and investors were expecting a third Quantitative Easing as early as last summer. After Bernanke’s Congressional appearance, however, the markets reacted with a great deal of volatility, demonstrating both the market’s addiction to monetary stimulus and the Fed’s control over the markets, sometimes called manipulation.
Though gold has been volatile as well, over a period of time is has been less volatile relative to other indices. Also, measured over time, gold has been more profitable. Though the gold market, like everything else, experiences the effects of Fed policy, it has steadily been in a bull market for a very long time. Can you name another commodity or a stock that has been in a bull market for eleven years and realized a 600 percent return?
So, the Federal Reserve’s monetary easing programs and fiscal stimulus cannot change gold’s status as the most powerful and important investment of the past decade, but it can skew the perception of its performance on a day-to-day basis. After the appearance before Congress five weeks ago, the Fed announced through one of its Governors that there would a “sterilized” Quantitative Easing, which is an attempt to mitigate some of the pernicious effects of flooding the market with liquidity.
Then, last week it was perceived that Bernanke had announced another round of Quantitative Easing. The markets, including gold, were trading high on the news, with gold up over $40 in intraday trading. This was just the news, mind you, and Bernanke did not actually ever say that Quantitative Easing would not or would take place in plain language.
So it should not come as a surprise that today the Fed’s signals are again being reinterpreted and misinterpreted with the minutes of a Federal Open Markets Committee meeting indicating that the Fed is now hawkish on Quantitative Easing 3. The gold market is currently recoiling from this news, but considering all the volatility in the market beginning with Bernanke’s original appearance before Congress that really should not concern the prudent investor.
No matter what the Fed says, they are going to have to print more money in one form or another over the coming months. They have been doing it since the last round of Quantitative Easing and simply using other names and guises. They can, will, and must continue the policy of liquidity injections in the future. Remember, the market reacted with a $40 surge on just the news of a Quantitative Easing program, not the actual program itself and not an actual announcement of the program itself.
Imagine what will happen when Quantitative Easing 3 does hit the markets. It’s best to get in gold now, while prices are affordable, and stay in the gold market for the inevitable Quantitative Easing.
Senior Staff Writer – Certified Gold Exchange
US Gold Market