If you haven’t heard, the Fed yesterday decided to hack $10 billion from its monthly $85 billion in bond purchases. Some are saying that the move is definitely bearish for gold while others believe that gold could benefit from the change.
Traders themselves may not be sure what gold is supposed to do. When the tapering news broke yesterday the gold price went up almost $9 before falling back to even. This morning gold plummeted into $1100 per ounce territory with a $20 freefall.
The reality is this: a $10 billion taper is a small percentage of the money that is being thrown at the economy each month, but it is very symbolic. Our government wants us to believe that the economy is healthy enough to stand on its own two feet, but $10 billion is nothing in the grand scheme of things.
Those who have benefited from QE aren’t too worried about the $10 billion taper because the Fed is still going to throw $75 billion each month into the economy. They see this as a positive and will likely continue to remain in the markets that made them money in 2013.
Household investors may view tapering as the official end of the economic crisis, thus providing a boost to stock markets and other dollar-based assets. Washington and the media have worked overtime to persuade mom-and-pop investors to come back to stocks, bonds and cash accounts, and the $10 billion taper could be enough to send them over the fence and back into paper.
The $10 billion taper is the start of something much bigger. Eventually the Fed will cease QE completely; whether that happens by will, force or lack of money remains to be seen. The next step will be to raise interest rates, and at that point gold will almost definitely start to rise. Rising interest rates were great for gold from 1960 to 1980, so while gold prices may fluctuate for the next few months they will be forced higher with interest rates and inflation.