Fed Inaction "Supportive" of Gold Price

THE DIRECTION of US Federal Reserve policy is likely to be positive for the Dollar Gold Price, according to an analyst at a major bank.

James Steel, precious metals analyst at HSBC, believes it is now unlikely that the Fed will call an early end to QE2, its second round of quantitative easing. Due to run until June, QE2 is the Fed's $600 billion asset purchase program, aimed at increasing the supply of money in the economy.

Steel believes the continuation of QE2 as scheduled will give support to the Gold Price.

"The debate over an early end to QE2 is finally subsiding, with the chances of an early end rapidly diminishing," wrote HSBC analyst James Steel in a note. "This is supportive of gold."

Steel added that HSBC's currency strategists believed "the complacency in the financial markets as regards US interest rates suggests that rates are likely to stay lower for longer," adding that this would likely work against the US Dollar.

His view is supported by comments from Fed officials.

"On the subject of monetary policy, we would be very surprised if we didn't complete QE2," said William Dudley, president of the New York Federal Reserve.

"On unemployment, we have seen the rate decline from 9.8 percent to 8.7 percent, but it is not clear that the strength in employment that we have seen in the past few months will be sustainable," he added.

Fed chairman Ben Bernanke described recent inflation as "temporary and relatively modest" last month in testimony to the US Congress.

The Fed has held its main targeted interest rate, the Fed Funds Rate, at 0.25% since 16 December 2008.

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