2012-02-10

Gold Price Climbs after BOE, ECB Meetings

The gold price advanced $11.33, or 0.7%, to $1,745.37 per ounce Thursday morning after central banks in England and the euro zone reiterated their dovish stances on monetary policy.  The price of gold held steady near $1,735 in overnight trading, but turned sharply higher after the Bank of England (BOE) announced £50 billion of additional quantitative easing.  The European Central Bank (ECB) kept its benchmark interest rate at a record low of 1% and ECB President Mario Draghi warned of “high uncertainty and downside risks” at his monthly press conference.

At a speech in California, Williams alluded to the possibility of further monetary easing.  “The policy actions the Fed takes from here will depend on how economic conditions develop, and they will change as economic circumstances change…We may still need to provide more policy accommodation if the economy loses momentum or inflation remains well below 2%.”
“In this situation, it’s vital that the Fed use all the tools at its disposal to achieve its mandated employment and price stability goals,” Williams added.  “Should that occur, restarting our program of purchasing mortgage-backed securities would likely be the best way to provide a boost to the economy.”
Williams also urged his audience to not get “carried away” over last week’s better than expected employment report.  “250,000 jobs good, but…to see significant changes, we need to add 300,000 or 400,000 jobs per month.”  This comment echoed remarks earlier this week from Fed Chairman Ben Bernanke, who said that the unexpected decline in the unemployment rate to 8.3% “no doubt understates the weakness of the labor market in some broad sense.”

These comments suggest that the Fed continues to view deflation as a significantly greater risk than that of inflation.  Furthermore, if the deflationary risks escalate in the months ahead, the Fed has now laid out a playbook that would undoubtedly involve further money printing.  As a result, the gold price is likely to remain a prime beneficiary of these policies going forward.

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