Will the Fed’s Policy cut Down the Price of Gold?

In previous years, the FOMC’s expanding monetary policy (e.g. lowering interest rates) has raised the demand for gold, which supposes to protect its investors from the potential devaluation of the U.S dollar. Therefore, the FOMC’s recent decisions to cut down its asset purchase program should have pull down the price of gold. In reality, gold continues to recover. Does this mean, the FOMC’s policy have little effect on the gold market? Also, if not the FOMC, what could keep the price of gold rising?

The recent rally of gold price has also reflected in the rise in gold ETFs such as SPDR Gold (NYSEMKT: GLD) and iShares Gold Trust (NYSEMKT: IAU): SPDR Gold added nearly 10% to its value since the beginning of the year. iShares Gold Trust rose by a similar rate. Due to the increase in the price of gold, these ETFs demand grew during February: iShares Gold’s holdings rose by 1.5% during the month; SPDR Gold’s gold holdings increased by 1.3%. But could this rally slowdown if the FOMC tapers again its long term securities purchase program in its next meeting at the end of March?

Gold and the FOMC’s policy

The FOMC tapered  quantitative easing 3 from $85 billion of long term securities per month to $65 billon per month as of February within two meetings. This decision, however, didn’t slow down the recent recovery of the price of gold.

As you can see, the decision of the FOMC back in 2013 to start QE3 increased the U.S money base, but gold price continued to fall. Therefore, this finding suggests that the FOMC’s plan to taper QE3 will also have little adverse effect on the price of gold. For now, this theory seems to hold up and the two tapering decisions didn’t curb the recovery of gold.

Even though the FOMC’s asset purchase program may not have a strong effect on the price of gold, the progress of the U.S economy continues to indirectly affect the demand for gold as an investment. In the past couple of months, several reports showed little progress in the U.S economy including in the housing, manufacturing and labor markets. E.g. fewer than 200,000 jobs were added in the past couple of months, and the U.S GDP grew by only 2.4% in the fourth quarter of 2013 — in comparison in the previous quarter the GDP grew by 4.1%.  If the U.S economy slows down, it could shift investors towards safe haven investments such as gold and U.S treasuries bonds. The U.S dollar is another factor that could affect the path of gold price.   

Gold and the US dollar

The progress of the U.S economy could also shift the direction of the U.S dollar, which is strongly correlated with the price of gold.

In the past several months, the correlation between the two has increased. Moreover, the U.S dollar depreciated against the Euro and several other currencies. Therefore, if the U.S dollar continues to fall, it could positively affect the price of gold.

Final note

The gold market could benefit from the slowdown in the U.S economy. Moreover, even if the FOMC continues to reduce its asset purchase program, it is likely to little to no effect on the price of gold.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.