Federal Reserve Spurs Further Interest in Gold
Just two words last week from the Federal Reserve have experts believing that gold will continue to rise. Those words are quantitative easing. The Federal Reserve said in its statement that we could see more QE as early as November. For gold investors this is a good thing as it creates two main factors for the price to rise.
The more dollars that get “printedâ€, the more dollars will be chasing a limited number of ounces of gold. This simple set of supply and demand circumstances will create rising prices in gold.
Quantitative easing scares investors worldwide. Money printing creates nervousness due to concerns of future inflation. Inflation erodes purchasing power and reduces returns on dollar denominated assets. Therefore when inflation is a concern money flows out of other investments and into gold, forcing prices to rise.
Quantitative easing is a monetary policy by which a central bank will increase the money supply by increasing the reserves of member banks. This is usually done when other attempts have been unsuccessful i.e. lowering interest rates.Â
QE is achieved by the central bank by first crediting its own account with money that it created out of thin air, then buying mortgage backed securities and government and corporate bonds etc. from banks and other financial institutions referred to as open market operations. This frees up cash for the banks to lend.Â
The beauty of the process is the fractional reserve system that governs banks. This allows banks to lend many times over the amount of money that they have in reserve. The unintended consequences of QE are hyperinflation or banks choosing not to lend into a broken system where defaults are still very high.
Hyperinflation is the worse of the two because it erodes savings until they become worthless and makes food and other necessities hard for most people to afford. Gold in this situation, as seen in examples throughout history, tends to hold its value and even grow.
The QE that the Fed is proposing could be the largest the world has ever seen. I have heard estimates of up to $5 trillion.