The Fed and Gold

The Fed, or Federal Reserve System, was established in 1913 as a central banking system for the United States with the intent purpose of 1) maximizing employment, 2) stabilizing prices, and  3) moderating long-term interest rates. Since then, the responsibilities of the Federal Reserve have expanded often causing confusion around the roles and responsibilities of the entity.

The Fed v. the U.S. Treasury

The Federal Reserve System works in partnership with the U.S. Treasury to monitor and influence the economy. The Fed is primarily responsible for influencing the economy by changing the supply and demand of money, whereas the U.S. Treasury is primarily responsible for influencing the economy through tax and governmental spending policies.

Does the Fed Buy Gold?

When asked, “does the Fed buy gold?”, most Americans would probably guess, yes. However, the Federal Reserve does not in fact buy or sell any gold. Instead, they store gold owned by the U.S. Treasury. The gold is essentially converted to cash, which the Federal Reserve loans out. The Federal Reserve operates like a non profit, which means that any profit accrued from the interest on the loans is paid out to the U.S. Treasury at the end of each year.

This money is then used to keep the American system running. Funds are spent on things such as education, veteran benefits, military, community development, energy and environmental issues, international affairs, etc.

Should the Fed Buy Gold?

It doesn’t make sense for the Fed to own gold for gold and interest rates – which the Fed mandates – are competing assets. Typically the market reflects an inverse relationship between the two: when interest rates are low, gold trends upward and visa versa.

Will the Fed Increase Interest Rates?

Rumors began flying at the onset of 2016 about impending interest rate hike. However, as of March 16, 2016, the Federal Reserve Committee voted against a rate hike. If a rate hike means gold decreases in value, then the decision to forgo a rate increase should mean a bullish market for gold.

For more answers regarding the current value of gold and the bullish state of the market, contact our staff today. We’re happy to help you determine if gold investing is right for you.