Precious metals have enjoyed a spectacular rise this week after the Federal Reserve signaled that interest rates will stay low for an extended period of time, no changes to policies or forecasts and telegraphed the end of its bond-buying program.
Quantitative easing status quo
The historic first press conference for the Federal Reserve was widely anticipated, as the white-marbled institution is often shrouded with a mystique regarding inner deliberations. In the announcement, the Federal Reserve projects growth to slow in the United States this year in the range of 3.1 to 3.3 percent while core inflation will rise to 1.3 to 1.6 percent. This discrepancy below its 2 percent inflation mandate could leave the door open to more monetary easing. Quantitative easing provides a headwind for the dollar as higher volumes of currency in circulation dilutes marginal value, which is serving as a catalyst for lifting gold and silver as a perceived safer form of money.
The Federal Reserve Chairman signaled a termination of its controversial $600 billion bond buying program as planned, expecting to keep the size of the $2 trillion balance sheet steady by reinvesting the proceeds when bonds in its large portfolio mature.
Although gold and silver are not always inversely correlated to the dollar, today the markets have demonstrated a voracious appetite moving higher as the dollar falls. The metals also benefited from some traders who were required to cover short positions and had bet against the metals prior to the Federal Reserve press conference.
The World Gold Council releases report
The World Gold Council reported that the long-term supply and demand dynamics for the yellow metal and a number of macro-economic factors ensured gold remained a sought-after asset. While inflation rates in countries such as India and China appear to have moderated, they remain uncomfortably high, promoting activity in the gold market as exemplified by higher delivery volumes in the Shanghai Gold Exchange. Investors will note that although gold prices did not react as much as oil to rising geopolitical tensions and the Japanese catastrophe this was in part due to gold's ability to absorb economic shocks and remain less volatile. Central bank activity indicates a continuation of the trend of limited supply and potential net purchases.