The Fed’s Balance Sheet: $1 Trillion…$2 Trillion…$3 Trillion…

Morgan Stanley believes the policy makers at the Federal Reserve will decide to continue with asset purchases for another two years. The firm explains in a note, “We are skeptical that dissenters within the FOMC on current monetary policy will succeed in overturning the current policy settings before the end of 2014.” The report adds, “We expect that very low nominal interest rates, an ongoing commitment to QE3 and a below-par recovery with attendant pressure on the dollar will still combine to encourage investment buying of gold.”

The Fed is already estimated to be effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets. If the central bank continues purchasing $85 billion in securities through 2014, its balance sheet will easily climb near $5 trillion or more. We are truly in unprecedented financial times as central banks around the world try to keep the system afloat.

As a result, many investors and entities turn to precious metals as an insurance policy. Gold has been on a 12-year winning streak as central banks not running the printing presses purchase gold. Alexei Ulyukayev, First Deputy Chairman, recently announced that gold accounts for nearly 10 percent of Russia’s foreign reserves. Ulyukayev also told reporters in Davos that the the Bank of Russia will continue to “pursue this course” of adding gold to reserves.

In general, central banks around the world became net-buyers of gold in 2009 for the first time in decades. Earlier this month, new data from the Census and Statistics Department of the Hong Kong government showed that gold imports by China totaled 91 metric tons in November, almost double October’s haul. Depending on December’s reading, total imports for 2012 could easily top last year’s amount by 400 tons.

Investor Insight: Gold: Is The Bull Market Really Over?

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Disclosure: Long EXK, AG, HL, PHYS