What Does the FED Decision Mean?

On Wednesday the FED announced that it will release a new round of Quantitative Easing purchasing 600 billion Dollar worth of the U.S Treasuries over the next two quarters. That is 75 billion a month which is pretty much what was expected. The price of gold has been very volatile over the last few weeks as everyone has been waiting for the FED announcement. Now as that is out of the way and the program wasn’t considerably larger or smaller than expected, gold can continue to increase its value.

Both investors and retailers have been rather careful when making the decision to buy gold as there has not been a clear direction for the market. The Fed announcement should calm down the market as the U.S government has shown willingness to support the economy whatever it costs. This sounds very positive but the consequences in the long-term might not be as rosy as everyone thinks. The Fed has already bought 1.7 trillion worth of Treasuries and the second round will bring the figure up to 2.2 trillion.

Everyone can imagine what will happen when the unemployment rate starts declining and the money finds its way to ordinary workers pockets. When looking at commodity prices, one can notice that all basic grocery products are already notably more expensive than a year ago. Just to give you few examples what has happened since January 2010:

• Corn: Up 63%
• Wheat: Up 84%
• Soybeans: Up 24%
• Sugar: Up 55%

And all this has happened in falling economy with practically no inflation.

Another important factor effecting gold and the market in general is the U.S election results. The Republicans won the House of Representatives from The Democrats which is likely to create political tension within the U.S as the Senate is controlled by the Democrats and the Congress by the Republicans.

Gold is very sensitive to any political or economical uncertainty and after recent news there is a lot of both coming from the U.S. Whether the government can agree on any of the domestic issues is difficult to say yet but it will not be a walk in a park for Barrack Obama. On top of that the QE2 will keep devaluing the Dollar against all other currencies and it is likely that emerging nations will have to follow the chosen route in order to keep their exports running.

Totally different kind of news regarding gold bullion demand is coming from the IMF. According to its September report it has only 71 tonnes left from its 403.3 tonne annual sales capacity. If the purchasing pace won’t slow down the IMF will sell out its capacity before the end of the year. This would leave the central banks in an interesting position as they cannot buy gold without interrupting the markets before January. Central banks are not price sensitive buyers so if they decide to invest in gold the price might jump up pretty dramatically. Personally I don’t think this will be the case as the banks would prefer to buy their gold from closed markets.