The Federal Reserve concluded its monthly meeting today, in which it decided to end its quantitative easing (QE) program and continue to keep interest rates low for a “considerable time”. These announcements were in line with analyst expectations. You can see the full official statement here.
The Fed’s QE program, introduced in 2008, involved the central bank making large monthly purchases of bonds and securities in attempt to stimulate the economy by pumping new money into it. The monthly purchase rate totaled as much as $600 billion in 2008 when the financial crisis first hit. In December 2013, the Fed announced it would begin “tapering” QE by gradually buying fewer bonds each month, starting at a rate of $85 billion. Since June of this year there has been talk of the Fed ending the program completely by the end of October, which was officially confirmed today.
Also at the meeting, the Fed pledged to keep interest rates at near-zero levels for a “considerable time” depending on how quickly inflation and unemployment numbers continue to improve.
What could this mean for gold?
QE was often criticized for contributing to higher rates of inflation, among other concerns. Many also believe it led to the stock market becoming overvalued. When the central bank pumps new money into the economy, which is essentially what QE does, asset prices increase and so-called “riskier investments” such as stocks and real estate become more attractive. Therefore, more money flows into the stock market without an actual increase in value, putting the market at higher risk of reaching a bubble or even a crash.
Now that QE will no longer be there to regularly inject money into the economy, stocks may lose their appeal and investors may turn towards less risky investments such as physical gold. For further information, see our previous blog addressing what QE means for gold.
While interest rates are set to remain near zero for the time being, Fed watchers are expecting them to be raised by mid-2015. The effect this may have on gold is not quite black-and-white. Although the popular belief is that higher interest rates are bad news for gold, historical data shows that gold has performed well during times of both high and low rates.
Former Fed Chairman Alan Greenspan: QE fell short of its goals, gold is a good place to put money these days
Former Fed Chairman Alan Greenspan, speaking to the Council on Foreign Relations, said QE ultimately fell short of its goals. He admitted the program did help increase asset prices, but said it didn’t help the economy improve in a real way (similar to what was explained in the previous section). Specifically, he said it “hasn’t been a success on the demand side for one fundamental reason. What you’re basically seeing is an explosion of assets, an explosion of reserve balances, and that’s the only two statistics that are moving.”
When asked the question “Where will the price of gold be in 5 years?”, Greenspan answered with “higher.” He was then asked “How much?” to which he responded “Measurably.” Additionally, according to the Wall Street Journal, “Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”
In other words, governments can always print more currency, but they cannot print gold – one of the main reasons investors turn to gold for diversification and long-term security. If you would like to buy gold for home delivery or even add it to your retirement account through a Gold IRA, call American Bullion today at 1-800-326-9598 to speak with an agent.