Federal Reserve Tapering Bodes Well for Gold

Gold and the Federal Reserve have a love-hate relationship. Gold investors typically smile when the Fed continues printing money and charges full steam ahead with its aggressive economic stimulus program. The opposite is true when there are signs that quantitative easing is slowing down, the unemployment report is positive or there is fear that the Fed may “taper” the stimulus program. These factors typically cause a decline in gold values, however, recent events have given investors a few things to consider about how tapering might bode well for gold.

Gold’s Pause after Tapering

Here’s a question for you, is the stimulus better or worse for gold values? A recent article from MarketWatch stated that after the Comex session ended on Wednesday, the Federal Reserve said it’s cutting its stimulus program on Feb. 1 by another $10 billion a month to $65 billion. “Initially, precious metals showed a somewhat positive reaction to the news with gold rallying to a high of $1,270 overnight,” said Fawad Razaqzada, technical analyst at FOREX.com, “but it has dropped quite sharply from there.” Although there’s been a drop of close to 2% in gold prices in the latter part of the week, it’s interesting to note that gold values didn’t make a substantial dip.

Emerging Economies and Gold

Issues in the Ukraine, Turkey and Argentina have been heating up. As currencies in these areas of the world came under increasing stress, they looked to a surplus of U.S. dollars to help fund their economies. Now with a sudden pullback from the call for tapering, it became evident that gold is the best alternative. What should have been a major hit against gold due to the tapering turned into an initial gain with a gentle letdown.

The Case of Turkey and Gold

Turkey’s economy has been performing poorly recently. The lira has lost close to a third of its value since May. In an effort to combat the declining value, the central bank of Turkey called for emergency interest-rate hikes on Tuesday which helped the lira tremendously. This turmoil shines well for gold because demand for the yellow metal has increased significantly in Turkey. Gold imports leapt to their highest annual level on record in 2013, which more than doubled the numbers seen in 2012.

Gold’s Outlook Moving Forward

Investors are keeping eyes on the Ukraine and Argentina. If the need to buy gold keeps up from these emerging economies then it’s very possible that future tapering from the Federal Reserve will continue to have less of a dramatic impact on precious metals. In a recent interview from Bloomberg, Alix Steel and Kenneth Hoffman discussed the future of gold and how these recent events may impact the yellow metal. Steel asked, “We’ve seen all these firms lower their forecast, Morgan Stanley was the most recent lowering their forecast 12% to $1,160. Are we going to see these guys rethink their strategy when it comes to gold?” Hoffman replied with, “If gold keeps going higher I think they probably will. They are all thinking this was going to be a slam dunk. Taper means short gold and it’s not working out so far. That’s going to be the big question going forward, so watch those emerging economies.” Gold is still up over 3% from the start of the year and as other emerging economies remain thirsty for gold, this could be just the break the yellow metal needs.

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Resources: HurriyetDailyNews, WSJ