Gold Prices Gain on Fed’s Continued Economic Stimulating Policies

Gold prices edged up on Wednesday after the Federal Reserve announced new set of economic stimulating measures, boosting metal’s inflation-hedge appeal while weaker dollar also lifted the demand of the yellow metal.

Gold futures for February delivery gained $8.39 an ounce or 0.5 percent to settle at $ 1,717.90 an ounce while spot gold added 0.2 percent to trade at $ 1,713.69 an ounce.

The SPDR Gold Trust (ETF) (NYSE: GLD) ended the day 0.08% higher at $165.79.

The Federal Reserve, which announced its latest policy statement on Wednesday, looked in no mood to scale down the enormity of quantitative easing as long as the labor market showed drastic improvement. The central bank said that it will keep benchmark interest rates at record zero level until the unemployment level falls down to 6.5 percent.

The Fed also said, so long the rate of inflation remained under control (under 2.5 percent) one or two years ahead or inflation outlook remained under control, it won’t take a turn in its quantitative easing program.

Besides, as expected, the bank announced $45 billion monthly bond purchase program. Already, Fed’s monthly $40 billion mortgage-backed assets buying program is on since September.

According to metal analysts, the unprecedented steps adopted by the Federal Reserve will prove very bullish for gold in the mid to long run. As seen by policy statement, the Fed is likely to print excessive currency in order to provide impetus to the U.S. economy—which in turn will boost gold’s inflation-hedge appeal as rampant cash printing will result in currency debasement.

Meanwhile, economists, according to Reuters are of the views that Fed’s new target of bringing down the rate of unemployment to 6.5 percent will take some time. Just last week, a data provided by the U.S. Labor Department showed that unemployment rate eased marginally to 7.7 percent in November, from 7.9 in October— and the drop in unemployment rate came  only after unexpectedly strong gains in non-farm payroll in Nov. even as many Americans moved out of the job market or completely gave hopes for  finding a new job.

“That’s a bullish for gold for the Fed to say it will keep interest rates low until unemployment rate drops to 6.5 percent – it doesn’t look that’s going to happen anytime soon,” commented Bill O’Neill, partner of commodities investment firm LOGIC Advisors in a note to investors.

Support also came from weaker dollar. The dollar edged lower on Wednesday against major traded currencies after the Federal Reserve reaffirmed its commitment to continue with its ultra loose monetary policy.

Typically, a weaker dollar tends to push the demand for dollar-dominated commodities, as holders of other currencies find cheaper to buy.

The ICE Dollar Index, a measure on U.S. unit’s performance against a basket of six major traded currencies, edged lower to 79.791 on Wednesday, from 80.061 in late North American trade on Tuesday.

“ [The continuing economic stimulating measures from the Fed] will further weaken the U.S. dollar and support gold well into 2013, with volatile trading patterns along with profit-taking periods as well,” wrote Jeffrey Wright, managing director at Global Hunter Securities in a note to bullion  investors.

However, Wright also added that prices will not rally in the near term; rather it will gradually advance, probably peaking at $1,850 an ounce, in the second half of 2013.

Moving to some other precious metal markets, silver prices climbed 1.7 percent to end the day at $33.51 an ounce.

In platinum group metals, spot platinum inched up 0.1 percent to close at $1,634.74 an ounce while spot palladium edged up 0.9 percent to close at $ 695.47 an ounce.

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Post Written By: Ed Liston Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications. He is widely quoted in various financial publications on the Internet. When Ed is not writing about stocks, investing in stocks, talking about stocks, or otherwise doing something stock related, he likes to go sailing and fishing in his yacht.