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The speculation surrounding the meeting of the Federal Reserve policymakers scheduled for the week starting on June 17 and the perceived impact of this anticipation on the value of the precious metal serves as a good lesson.
Federal Reserve speculation
In recent weeks, various Federal Reserve officials, including the presidents of the Fed's regional banks, have made statements about the future of monetary policy. These communications have been digested by market participants and the media, and have been scrutinized in an effort to disseminate any hints about what the organization will do regarding the existing regimen of monthly asset purchases and interest rates in the near future.
Starting last year, the Federal Reserve has adopted a policy program that involves buying $85 billion worth of debt-based securities every month. By expanding its balance sheet, the Fed wants to stimulate the economy by increasing the money supply, which in turn will hopefully bolster consumption and investment.
Also, the Federal Reserve has held interest rates close to record lows for years in an effort to bolster lending activity and invigorate the nation's economy.
Many global market participants have reacted strongly to this speculation that the Federal Reserve might change its existing stimulus, according to The Wall Street Journal. Federal Reserve officials have tried to mitigate the concerns of global investors, assuring them when they start paring down the existing stimulus plans, this doesn't mean they are going to eliminate asset purchases entirely.
In addition, Bernanke has indicated that the record-low interest rates, another key aspect of the existing monetary stimulus plans, will likely stay depressed long after bond purchases end, the media outlet reports. The Fed chief emphasized this point in testimony that he provided to Congress last month, as he stated his prediction that the period between interest rates rising and asset purchases stopping should be "considerable."
AMP Capital head of investment strategy Shane Oliver mirrored that the end of Fed stimulus measures are a long way off, according to MarketWatch.
"The Fed will only start to slow and then unwind its stimulus programs when it's completely comfortable that the economic recovery is self sustaining," Oliver wrote on June 14, the media outlet reports. In addition, he stated that the Federal reserve will probably emphasize that "interest rate hikes are still a long way away."
Even amid these reassuring statements provided by market experts, many investors are still rather concerned about the potential changes that the Federal Reserve could make to these key rates, according to The Wall Street Journal.
"The market is saying, 'The fundamental economic outlook really hasn't changed much, but we are getting more worried about Fed policy,'" Jan Hatzius, chief economist at Goldman Sachs, has stated, the media outlet reports.
Rising gold prices
August gold was 0.6 percent higher at $1,386.20 an ounce on the Comex division of the New York Mercantile Exchange in early trade, according to MarketWatch. The contract rose to as high as $1,390.40 per ounce during the day.
In addition to speculation surrounding the stimulus plans of the Fed, another factor that was noted as being important to gold prices was a Labor Department report indicating that wholesale prices rose in May, the media outlet reports. The Producer Price Index increased 0.5 percent during the month. This figure was above the predictions of market experts, who forecast that the measure would rise 0.1 percent for the period.
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