Gold Prices Drop Slightly Following Fed’s Hold Off on Policy

Wednesday, gold prices dropped slightly when the Federal Reserve continued its silence on the new measures it will take to stimulate growth in the economy. According to the Fed, the growth is likely to improve in the long term.

The central bank carried on with its plan to retain interest rates for the short-term close to zero through 2014. The bank did not suggest whether it will buy additional bonds once its present program concludes in June.

Gold Prices Supported Partly by Fed

Price of the yellow precious metal for June delivery is $1,642.30 per ounce, after it dropped $1.50. In the past few months, gold prices were supported partly by the bond-buying programs of the Fed. To suppress interest rates for the long term, the bank purchased mortgage backed securities and Treasury bonds. The actions also facilitated spending and borrowing.

When the Fed retained the low interest rates, the programs pushed the dollar, which lead to the currency weakening against others. The prices of commodities like gold are in dollars. So, if the dollar weakens, the precious metal is an easy buy for those who trade in other currencies.

Vision Financial Markets metals trading’s vice president, Dave Meger stated that gold will be under a bit of pressure if there are no more bond purchasing programs. Investors may be pushed to put money in assets like bonds and stocks.

Relationship between Gold and Dollar

In a new research that looked into the relationship between the dollar and gold, it was revealed that the precious metal acts as a currency traded globally. The London Bullion Market Association’s bursar, Fergal O’Connor stated that several academic and market studies have shown that between the dollar and gold, is a negative relationship. This means that when the price of the precious metal goes up, the value of the currency drops and vice versa.

While the standard interpretation of this reveals that the price of gold moves inversely to the US currency, the analyst stated that the relationship of the metal is not restricted to the dollar. According to the analyst, returns on the precious metal in a currency are inversely proportional to the trade weighted returns of the latter along three terms - long, medium and short.

To throw more light on this, the analyst developed a chart which shows this negative relationship between gold and two other currencies besides the dollar - pounds and euro.

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