Fed Tapering and Gold in 2014

This was a historical week for gold. The Federal Reserve finally decided to begin tapering the economic stimulus program. Gold values took a hit after this announcement, but will investors see a turnaround from gold in 2014?

The Call for Tapering

Wednesday marked the day the Federal Reserve finally chose to pull back from the $85 billion per month bond buying program by $10 billion. Treasury bond purchases have been lowered to $40 billion and mortgage backed securities down to $35 billion – each a reduction of $5 billion. Interest rates, on the other hand, will still remain low.

Although the amount that was called for in this tapering was rather small, it had a big impact on gold prices. Gold fell below the $1,200 per ounce mark and remains down for the week overall. Silver prices dipped into the low $19 per ounce range, but seem less effected than the yellow metal.

Now it looks as if the unemployment rate will be the number to watch. As unemployment lowers, investors will see the Fed take its hand even further off the bond buying throttle. At that point, interest rates may also begin to return to normal.

Looking Forward – Gold in 2014

Clearly gold has been holding on to the stimulus program for some time now. As this comes to an end, gold in 2014 has other reasons to turn around. The basic principal of demand could be in gold’s corner entering into the New Year. The World Gold Council noted recently that gold supply has fallen in the third quarter as compared to last year. Jeff Clark is a senior precious metals analyst at Casey Research. He predicts that this recent lull in supply will continue into 2014. This combined with issues of gold mining remaining a cost effective business, could mean a serious damper on supply.

China is set to outperform India this year as the world leader in gold demand. China’s thirst for physical gold is on the rise which could bode well for the yellow metal. India, on the other hand, may move more aggressively on gold next year as well. Import interest rates are at an all-time high of 10 percent; however this tax may drop off if India’s economy continues to turn around. Furthermore, smuggling has become a serious issue in India ever since this import percentage has risen so drastically.

Now that the ominous cloud of “tapering” has been lifted, gold could have finally hit its bottom. Next year investors would be wise to keep their eyes on the unemployment rate, the overall supply of gold as well as physical demand from overseas.

Resources: CNBCGold Investing News