Federal Reserve taper talk has been in the news recently, with the central bank evincing an interest in cutting back on its monthly purchases of bonds due to a stabilizing economy. While it’s too soon to say how serious the Fed is about pursuing this path, it’s not clear that recent economic numbers are in fact strong enough to warrant pulling back on the accelerator. Even if the Fed does reduce its purchases somewhat, if the economy continues to weaken, the central bank may find itself increasing its quantitative easing (QE) measures in short order. In either case, the fundamental value gold offers remains unchanged, and its centuries-long role as a store of value seems unlikely to dissipate anytime soon.
How Strong is the Economy?
While the economy has certainly recovered from the depths of the financial crisis of 2008/2009, some of the latest reports have shown weakness. If this trend continues, the economy could slip into a dreaded double-dip recession. One of the headwinds to business activity is the federal government sequester, which will result in lost wages to employees forced to take furlough days, and could dampen economic activity as a result. In addition, the price of oil remains at elevated levels compared to past years, and this acts as another headwind to economic activity. While it is impossible to predict exactly how things will play out, it certainly doesn’t seem like the robust growth that would cause the Fed to aggressively cut back on its policy of stimulating the economy via QE is likely to erupt anytime soon.
Prospects for continued monetary stimulus
If it is true that the various headwinds facing the economy keep it from achieving liftoff and returning to robust growth, how will the Fed react? While this is hard to predict, given their past support of the economy via QE and other policies in the years since the recent financial crisis, it seems unlikely that they would take a “cold turkey” approach and remove all stimulus rapidly. A more likely approach might be to slowly taper down purchases of bonds over time, depending on the course of economic activity.
Gold’s historic role as a Store of Value
While the price of gold, as has been seen recently, can be highly volatile in the short run, in the long run it has served admirably as a store of value and a hedge against inflation. The yellow metal’s ability to preserve its purchasing power over time, and especially during periods of high inflation, gives it a strong story to tell to those who are looking to protect themselves from the ravages of inflation.
The Case for Gold
While there is currently a great deal of uncertainty about the strength of the economy as well as the future course of Federal Reserve policy, in the long run the massive expansion of the Fed’s balance sheet that has occurred as the central bank has bought bonds through its stimulus program has the potential to be inflationary. If this money floods into the economy and off bank balance sheets, the result could be rising prices for goods and services.
This makes the case for gold, in my opinion, a strong one. With its ability to survive financial crises over the years and to offer a defense against inflation, gold offers its owners a hedge against troubled financial times that few other assets can match. The recent strong buying of physical gold by investors who have rushed to gold dealers to make purchases in the wake of the precious metal’s price slump shows that others agree with this assessment as well.
Harry is a gold investment analyst with a true passion for precious metals. He has been working in the financial industry for over 25 years. Today, he contributes on various financial boards and enjoys writing about current political events and how they affect the gold investing landscape.
