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Fed Announcement Has Gold Down Slightly And Stock Markets Rallying

 |  by Michael Locklear

September 17,2012 – Gold prices are down slightly today after Friday’s rally. The current spot gold price is $1767, dropping slightly after Friday’s slight increase in last week’s overall 2% gain. The stock market rallied after  Bernanke’s  press conference on Friday where he laid out the current monetary easing actions known as Quantitative Easing 3.

Standard & Poor’s 500 was up 23.43 points, reaching its highest level since years end 2007, to close at 1459.99. The Dow Jones was also up 206.51 points to close at 13,539.86 the NASDAQ also rose 41.51 points. Clearly the stock market was extremely happy to hear what Ben Bernanke had to say on Friday.

Here are the remarks that caused the rally. After his introductory remarks and some background information Federal Reserve Chairman Ben Bernanke said this in his press conference:

Accordingly, the FOMC decided today on new actions, electing to expand its purchase of securities and extend its board guidance regarding the federal funds rate. Specifically, the committee decided to purchase additional agency mortgage-backed securities (MBS) pace of $40 billion per month. The new MBS purchases– combined with the existing maturity extension program and the continued reinvestment of principal payments from agency debt and agency MBS already on our balance sheet– will result in an increase in our holdings of longer-term securities of about 85 billion each month for the remainder of the year. The program of MBS purchases should increase the downward pressure on long-term interest rates more generally, but also on mortgage rates specifically, which should provide further support to the housing sector by encouraging home purchasing and refinancing.

This new announcement offers a slightly different approach from previous monetary stimulus actions on the part of the Fed. In the past the Fed’s focus has been mainly on purchasing Treasury bonds. Now it’s a shift towards mortgage-backed bonds, interest rates on treasury bonds were down slightly. The Fed hopes its new moves will support banks in moving towards lower rates on home loans and increased economic activity by encouraging more construction. The biggest winners in the stock rally on Friday were of course the big mortgage banks. J.P. Morgan, Chase and Bank of America were the blue-chip leaders.

The Fed however has not taken a complete departure from his previous positions regarding the purchases of treasury bonds, they are in fact adding these new actions as an addendum. They plan to continue buying longer dated treasury bonds until the end of the year. Their strategy is to swap the longer-term dated bonds for short-term bonds as a continuation of Operation Twist.

Since inflation concerns had the stock market a bit shaky and gold prices on the rise as investors seek a hedge against what they believe is coming inflation it might be important to note what Bernanke had to say on the subject:

And finally, on inflation: inflation has buried in recent years with swings in global food and fuel prices caused by a range of factors, such as drought and geopolitical tensions. However, overall inflation has averaged very close to the Committee’s goal of 2% per year for quite a few years now, and a variety of measures show that longer-term inflation expectations are quite stable. The Federal Reserve is fully committed to both sides of its mandate — to price stability as well as to maximum employment — and it has both the tools and the will to act at the appropriate time to avoid any emerging threat to price stability.

It will be interesting to see how gold bulls react in the coming days.

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