Why the Fed’s balance sheet is still expanding



Fed’s balance sheet

Like any balance sheet, the federal balance sheet consists of assets and liabilities. Assets include U.S. Treasury securities, discount loans, coins, and cash items. Liabilities include outstanding currency, reserves or bank deposits, and foreign and other deposits.

Fed BS

Huge expansion in the Fed’s balance sheet

After the 2008 global financial crisis, the Fed’s balance sheet expanded from ~$850 million to more than $4.4 billion. The Fed buys long-term securities. Long-term securities provide banks with excess reserves for possible lending. This creates more credit.

As a result, the money supply increases. This leads to inflation. All of this is usually positive for gold prices. Gold prices normally have a positive relationship with an expanding Federal Reserve balance sheet.

Tracking the Fed’s balance sheet

The Federal Reserve releases its balance sheet details every week. It’s important for investors to keep an eye on this data. It shows investors if there’s a trend coming from the data.

Article continues below advertisement

If the Fed’s balance sheet keeps increasing every week, it might signal market expansion. This could increase gold prices. The movement is gold prices is dictated not only by the actual current size, but also by expected size based on the Federal Open Markets Committee (or FOMC) policy decisions. For example, as the Fed started tapering, some of the funds exited gold.

The market perception is that the Fed started tapering. However, the Fed’s balance sheet is still expanding. It expanded by 0.56% in one month. It was $4.450 for the week ending September 17. It grew to $4.474 trillion for the week ending October 15.

Impact on companies

Although the Fed’s balance sheet is still expanding, the expectations of the Fed’s taper and the eventual rate hike are already being felt. These trends are negative for gold prices and gold-backed exchange-traded funds (or ETFs) like the SPDR Gold Shares (GLD).

Eventually, they will be negative for gold stocks like Goldcorp Inc. (or GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (or NEM), Kinross (KGC), Yamana Gold (AUY), and exchange-traded funds (or ETFs) that invest in these stocks—like the Gold Miners Index (GDX).


More From Market Realist