The U.S. central bank delivered everything the market wanted, while leaving open the door for an even bigger program if necessary.
Gold prices spiked after the Federal Reserve announced its long-awaited third round of quantitative easing (QE3). The central bank said it would buy $40 billion worth of mortgage-backed securities per month, indefinitely. The purchases will begin Friday.
The Fed also extended its pledge to keep its benchmark overnight interest rate—the federal funds rate—near zero from late 2014 to mid-2015.
These actions by the Fed were anticipated by most market participants. Expectations centered on either a program totaling close to $600 billion or an open-ended program of $50 billion a month or so, which is not far from what was delivered.
Importantly, the central bank promised to add to purchases if the labor market doesn’t improve.
The open-ended nature of QE3 and the Fed's flexibility in terms of adding to purchases if growth doesn't improve is a particularly bullish combination for gold. Total purchases could conceivably end up at over $1 trillion. On the other hand, it could be much less.
But in either event, the U.S. central bank has made it clear that it will be provide an extremely accommodative monetary backdrop as long as economic growth remains sluggish. Gold bulls couldn't have asked for more.
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