Why Recent Federal Reserve Action Bodes Well For Gold

At first glance, Federal Reserve chairman Ben Bernanke’s announcement in his final Congress address last week that the bank was reining in its extensive quantitative easing programme is bad news for safe-haven assets such as gold.

The hard currency often thrives in terms of macroeconomic instability and rising inflation, so news that the world’s largest economy was slowing the printing presses has caused gold prices to dip heavily in recent days.

Despite these developments across the Atlantic, however, I believe that the backdrop remains ripe to support a resurgence for gold for next year and beyond. And if you share my enthusiasm for the shiny metal’s price prospects, then exchange-traded funds (ETFs) SPDR Gold Trust (NYSE: GLD.US) and Gold Bullion Securities (LSE: GBS) are a fantastic way to gain exposure to a rising metal price.

Fed earmarks prolonged monetary support

Gold prices have suffered constant pressure throughout the course of the year, as ebullient market sentiment has seen investors bale out of less-risky assets and into the likes of stocks and shares. While the FTSE 100 has gained 13% during the year to date, gold prices have conceded 28% during the same period, and were recently hovering above three-year lows around $1,190 per ounce.

In particular, traders have been increasingly cheered by signs of progress in the US economic recovery. Indeed, this backdrop prompted the Federal Open Market Committee (FOMC) to announce that, as of next month, the central bank would be reducing asset purchases to $75bn from $85bn per month. This represents a landmark event following five years of continuous monetary support, even though the modest reduction in bond buying illustrates nothing more than a toe-dipping exercise.

Instead, a more pertinent point for gold is that the FOMC said that it plans to keep its benchmark interest rate around record lows of 0.25% “well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”

With the country’s jobless rate currently standing at 7%, and the consumer price index indicating a modest 1.2% year-on-year inflation advance in November, I fully expect US monetary policy to remain loose well into the future.

Make no mistake: the Fed is fully aware of the still-fragile state of the US economy — a stalled housing market recovery, elevated jobless levels and low inflation are of particular concern — and alluded to the possibility of revving the printers up again should the financial backdrop fail to gain traction.

With the über-doveish Janet Yellen set to assume the Fed hot seat in January, and the country’s economic recovery far from out of the woods, I believe that continued monetary support should support a fresh spurt in the gold price next year and beyond.

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> Royston does not own shares in SPDR Gold Trust or Gold Bullion Securities.