Gold price shows muted reaction to upbeat Fed

Too soon to taper?

The gold price moved slightly higher before falling back  $17 an ounce to fresh one-month lows at $1,350 in after-hours trade after the US Fed’s decision on monetary policy struck an upbeat tone about prospects for the US economy.

Precious metals investors had been worried that Bernanke would announce that the Fed will start tapering off its quantitative easing program.

The Fed has been reviewing QE and is eager to throttle back asset purchases at the first signs of a solid economic recovery in the US, but Wednesday brought no concrete plans.

The Federal Open Market Committee said risks to the economy and employment have diminished and the central bank expects growth to pick up in 2014.

The Fed also said the unemployment rate could fall to 6.5% – its target rate to start dialing back its ultra-loose monetary policy – by next year instead of 2015 as previously estimated.

Bernanke in a press conference later said that QE could be scaled back if the economy improves further – something the chairman has said on more than one occasion in the past :

“If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

Bernanke’s mention that it could happen as soon as this year is what drove gold lower. The metal had been hovering around $1,360 up until that point.

QE, which floods markets with cheap money, burnishes gold’s status as a storer of wealth.

The first QE program was announced by Bernanke in December 2008 when an ounce of gold cost $837.50.

Bernanke has poured more than $3 trillion of easy money into the US since December 2008 when Q1 kicked off and the pile continues to grow at a rate of $85 billion a month.

Upbeat Fed lifts gold price

QE and negative real interest rates boosted gold’s perceived status as an inflation buster and now that the Fed is keeping the dollar printing presses humming it is keeping a floor under the price. For now.

It is worth keeping in mind that even with the dramatic sell-off on precious metals markets this year, an ounce of gold is still worth 60% more than before QE.

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