The Federal Reserve and “Gold Positive Signals”

Since 1913, the Federal Reserve has held control over the United States monetary system and has worked to maintain its stability by creating regulatory policy, supervising banks, and providing services to various financial institutions. When the country is faced with a financial crisis, though, the Fed also has the capacity to employ certain emergency measures in order to keep the economy afloat. Over the last several months, the Fed has had to put these measures into action as part of its response to the COVID-19 pandemic.

Read on to learn more about how the Federal Reserve addressed the economic ramifications of the pandemic, how gold has performed on the market in comparison to the sectors of the economy managed by the Fed during this time, and how various asset classes may fare in the coming months and years.

What is Quantitative Easing?

In short, quantitative easing is a monetary policy in which a central bank purchases government bonds, securities, and other financial assets—regardless of interest rates—in order to stimulate the economy and encourage spending, lending, and investing.

As the nation’s central banking system, the Federal Reserve has initiated quantitative easing in the past as a means of alleviating the impact of financial crises. Following the 2008 recession, the Fed spent trillions on bonds and mortgage-backed securities to inject money back into the economy and to keep the country moving forward.

In March of this year, as the COVID-19 pandemic began to hit the United States, countless businesses were forced to suddenly shut down, and millions of American workers were consequently furloughed or laid off. In response, the Federal Reserve brought back its quantitative easing program and quickly expanded its security-purchasing capacity to an unlimited amount in order to soften the economic blow.

Federal Reserve Chart, The Balance

Why is This Good for Gold?

Historically speaking, times of economic uncertainty have generally proven to be times of strong market performance for gold and other precious metals. Many consider gold to be a financial safe haven due to its reliability as a store of value and the consistent, millennia-old recognition of its purchasing power around the world. So, as the stock market has grown increasingly volatile, the U.S. dollar has decreased in value, and the Federal Reserve has deployed its stimulus efforts amid the COVID-19 pandemic, many consumers have flocked toward gold as a potentially more stable means of safeguarding their wealth.

Gold Price Historical Chart, Rosland Capital

 

In late July, gold hit a new record by surpassing $2,000 per ounce, and it has continued to maintain its market position around that price in the days since. In early 2000, gold wavered between $250 and $300 an ounce, meaning the price has increased by over 600% in the last 20 years.

What Happens Now?

While there’s no way to know our country’s financial future with certainty, some experts have speculated that the economic fallout from the pandemic could continue for years to come, even after effective treatment and/or a vaccine become available and “normal” life is able to resume in full. Despite the Federal Reserve’s mitigation efforts, the United States economy as a whole remains and may remain for some time in an extremely volatile state.

However, when it comes to gold, some analysts are predicting that the price rally is only going to continue—in fact, Bank of America recently raised its 18-month target to an unprecedented $3,000 an ounce. While the lack of clarity for what our economy’s future holds might feel a little disheartening, there is possible hope and stability to be found in the precious metal markets.