GOLD PRICE NEWS – The gold price rebounded toward $1,350 after the Fed meeting Wednesday, as the price of gold underwent a volatile session as the Federal Reserve announced a $600 billion QE2 plan. The gold price opened near unchanged at $1,355, but the price of gold subsequently plunged below $1,330 late this morning amid a modest rally in the U.S. Dollar Index (DXY). Following the Fed meeting, the gold price rebounded substantially as the DXY tumbled by 0.4% to 76.36.
The Federal Open Market Committee’s (FOMC) policy statement revealed Chairman Bernanke and the Fed’s plan to purchase $600 billion – or approximately $75 billion per month – of “longer-term” U.S. Treasuries by June 30, 2011. In a separate statement, the Federal Reserve Bank of New York announced that it will continue with its plans to re-invest $250 to $300 billion of proceeds from agency debt and agency mortgage-backed securities into Treasuries over the same time frame. As a result, while the headline number is $600 billion, the actual size of the current quantitative easing initiative will be between $850 and $900 million.
The remainder of the Fed’s statement was quite similar to that from the previous Fed meeting, as the central bank left interest rates unchanged and noted that the pace of the economic recovery continues to slow. Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, one again voted against QE2, noting that “the risks of additional securities purchases outweighed the benefits” and voiced concern that “this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”
While investors may feel the gold price’s response to a second round of quantitative easing was somewhat muted, it is important to note the substantial rally in the price of gold over the past two months leading up to the Fed meeting. Furthermore, although the $600 billion figure is undoubtedly significant, it is far lower than some economists and market pundits, notably Jan Hatzius of Goldman Sachs, had suggested was necessary to stimulate inflation.
However, despite the relatively calm reaction by the gold price, “Helicopter Ben” Bernanke and the Fed kept their options open for further money printing. The key part of the FOMC statement was that “The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”
Given that the Fed believes the creation of fiat currency out of thin air is necessary to meet its goals, it has essentially told the market that it will continue to print as it sees fit – a stance that should be music to the ears of those bullish on the gold price.