When a decision by the US Federal Reserve to reduce its stimulus program by $10 billion a month was announced this afternoon, gold indeed dropped, but not as much as some had expected.
The gold market has been awaiting the outcome of the Federal Open Market Committee’s two-day meeting with trepidation, expecting the central bank to scale back its quantitative easing program that since 2008, has pumped $4 trillion of easy money into the U.S. economy, and in the process, doubled the gold price. Even whispers from the Fed of a “taper” of quantitative easing have been bearish for gold.
When a decision was announced this afternoon, gold indeed dropped, but not as much as some expected it would. Many observers assumed that a reduction in QE stimulus was already baked into the gold price.
Spot gold initially fell over $25 — from $1,242 an ounce to $1,216.50 — after the Fed announced that it would reduce its $85 billion a month bond buying program by $10 billion, ending the trading day in New York at $1,217.60, a $13.50 fall from the last session.
At its last meeting of the year under the chairmanship of Ben Bernanke (Janet Yellen grabs the Fed reins in January), the FOMC said that QE would likely be reduced further at future meetings, but that will remain dependent on economic data. It said interest rates will be kept near zero percent “well past the time that the unemployment rate declines below 6.5%,” especially if inflation remains below the central bank’s target rate of 2 percent.
An excerpt from the actual transcript of the Fed’s announcement appears below:
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.
In a commentary, Kitco’s Peter Hug said he expects more of the same from the U.S. Federal Reserve in 2014, “as the Fed tries to dig itself out of the monetary quagmire caused by massive liquidity injections. At best, the Fed will have no choice but to graduate the pullback on bond buying, while keeping an eye on the bond market, which on the long end has implosion possibilities.”
While the Fed’s taper was negative news for gold and other precious metals, the equity markets, as predicted, saw a sharp rise.
AFP reported that U.S. stocks surged to record highs, with the Dow Jones Industrial Average climbing 292.71 points to 16,167.97, while the S&P 500 jumped 1.66 percent to 1,810.65. The markets were buoyed by the fact that the Fed decided to keep interest rates near zero, which support economic growth, and by extension, equities prices.