Chart courtesy of Kitco.com
The Federal Reserve has sprung a surprise on the markets by announcing its intention to buy $300 billion in longer-term Treasuries in order to assist the economic recovery.
We were watching gold prices decline throughout the trading day in New York when 'pop' they suddenly took off in a vertical ascent. We tracked around the air waves and found that the BBC World Service had a mention in their business broadcast about the Fed making the above purchase, then we found this article on Market Watch.
The Fed also tweaked its other credit-easing programs by committing to buy more mortgage-backed securities and agency debt and include more asset-backed securities under a new credit facility starting this week.
Most analysts had thought that the Federal Open Market Committee - the policy making arm of the central bank -- would keep the weapon of buying Treasuries in reserve in case of a crisis.
The decision to buy Treasuries shows that the crisis is here.
"To provide greater support to mortgage lending and housing markets," the FOMC said it would purchase an additional $750 billion of agency mortgage-backed securities. This brings the total amount of agency mortgage-backed securities to $1.25 trillion.
The Fed said it would double its purchase of agency debt to $200 billion.
"Moreover, to help improve conditions in private credit markets, the FOMC decided to purchase up to $300 billion of longer-term Treasury securities over the next six months," the statement said.
In addition, many unspecified types of assets will be included in the newest Fed credit facility, the Term Asset-Banked securities.
All of these purchases will increase the size of the Fed's balance sheet. The central bank has already doubled the size of its balance sheet to just below $2 trillion.
Click this link to read the article in full.
Our guess is that the word crisis put a rocket under the price of gold as the Kitco chart above aptly captures.
We are not out of the woods yet as some commentators have suggested – the team here think that we are just entering the woods and its not a pretty sight. Put your hard hats on and prepare for some wild swings in both directions, this market is hanging on to every word and action that hits the air waves and re-acting to whatever the latest sound bite might be. For us the order of the day is stay calm and hold on tight to our stocks. If you are a trader then there are a few 'options' either side of the strike price that will surely get your adrenalin pumping, if thats what you want!
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