It’s been quite a year for the gold market. Gold has been subject to volatility as a result of the Fed’s wishy washy stance on quantitative easing, the congressional gridlock, and an unsteady economic recovery.
Back in May, Federal Reserve Chairman Ben Bernanke hinted that a tapering of QE3 would happen sooner than later. This sent investors away from gold because it was a sign the dollar would increase in value. But then Bernanke failed to announce tapering after the September meeting as expected, and investors ran back to gold. It could still be some time before the dollar increases in value.
But the Federal Reserve is getting ready to make another announcement this afternoon. It has been in a two-day policy meeting to discuss QE again. Still, it’s highly likely they are not going to taper because the economy is not in a position to deal with it.
Following the government shutdown fiasco, economic data painted a poor picture of the economy. September data from the Department of Labor showed unemployment rates dropped to 7.2 percent, but the number of jobs created fell below expectations at only 148,000. Economists expected that number would be around 193,000.
The housing market has slowed down too. Upcoming home sales dropped 5.6% in September, reaching the lowest level in nine months, according to the National Association of Realtors.
So no one will be surprised when the Fed reports it will not taper…again. It’s obvious the Fed believes it needs to continue its bond buying program to support the economy.
So what does this mean for gold?
Gold Prices and the Fed
Well, the last time the Fed announced there wasn’t going to be a taper anytime soon, gold popped. The dollar was still going to be in the gutter for at least a few months, so it was worth it to invest in something that most often moves opposite to the dollar.
Now, many analysts are projecting there won’t be a taper until March 2014. That’s more than just a few months – that’s nearly half a year.
Scott Carter, chief executive officer of Lear Capital in Los Angeles, said to CNBC:
“It’s doubtful that we will see any tapering of bond purchases until much later in 2014. This should provide a tailwind for gold to move up in the coming months.”
Gold has a lot of time to show it can react to a dismally valued dollar, and some analysts are saying it will reach well above $1,400. But according to a CNBC market survey, not every analyst believes it can break through that level. They don’t think there’s enough momentum to push it that high.
But consider this…
Sure, maybe the dollar’s value isn’t enough to boost gold prices to $1,400, but what about the other factors that influence the gold market?
Philip Streible, senior commodities broker at RJ O’Brien in Chicago, said to Reuters:
“October data is going to be a lot weaker than expected, so because of that gold prices are continuing to rise.”
In addition, India’s festival season is coming, and the nation is the largest consumer of gold in the world. The demand for gold is going to rise significantly next month, and gold miners haven’t been able to keep up with high production because of high gold mining costs.
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So what happens when there’s a high demand and low supply? If you said prices surge, you’d be right.
UBS’ Dominic Schnider and Giovanni Staunovo told CNBC:
Taper delays will fuel “weakness in the U.S. dollar and the subsequent strength in the gold price could run further in the coming weeks”…if the euro tested $1.40 against the dollar, that “would facilitate a gold price move above $1,400.”
Next Move for Investors
Keep an eye on gold for the next few months. You may find now is the best time to move in, since the price could rise with each “no tapering” announcement. But be cautious; if the Fed decides to taper, this will drive gold prices down.
In early 2014, you should start to watch for signs of QE tapering by keeping a close eye on the unemployment rate, job creation data, and the housing market. If things are looking good approaching March, it’s probably a good idea to get ready to sell off.
But keep in mind, gold will be volatile during this time, so try to ride the waves as best you can. Each month, the Fed may threaten a taper, and that will affect gold, but every time the Fed decides to continue, it will likely rebound.
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