All eyes are now on the Federal Reserve meeting this Wednesday at 2pm eastern time.
Why is the pending meeting so important?
Because the Fed is expected to announce the tapering of its $120 billion per month bond buying program, which began at the onset of the Coronavirus pandemic last year.
Exactly how much of a reduction in bond buying will the Fed announce?
We cannot be sure yet; however, the mainstream consensus is that a reduction of $10 – $20 billion per month for the coming 1 – 2 quarters is likely.
Bond Taper and Gold Price
It is important to remember that the US Federal Reserve has no actual reserves with which to buy bonds in the first place. Any “bond buying” is a euphemism for printing-money, or the electronic equivalent thereof.
Bond buying is thus inflationary, because the Fed creates money out of thin air with which to purchase the bonds, which subsequently suppresses interest rates below true market values.
A tapering from $120 billion per month, to, for example, $110 billion or $100 billion, is thus relatively less inflationary than if the Fed had kept its bond buying program at current levels.
Generally speaking, less inflation is seen as a negative for gold, and conversely, positive for the value of the US dollar.
Markets are Forward Looking
The problem, however, with assuming that gold will decline in the weeks and months following the Fed taper, is that markets are generally forward-looking.
The central bank has been telegraphing for months ahead of time that it would begin to taper its bond buying program later this year… and now we have finally arrived at the moment where it appears the Fed will act.
This forward-looking expectation for relatively less inflation is why gold has continued to be weak over the last year, and is still trading nearly $300 below its all-time peak of $2,074 set in August 2020.
Be Wary of Selling Gold Now
Precious metals investors should be careful about selling their gold over the coming weeks, because any decline which occurs following the Fed taper announcement may, in fact, represent a final low for the correction which began in 2020.
Unfortunately, many traders get caught on the wrong side of the market at just the most critical times. For example, we might expect that, on the Fed taper announcement on Wednesday, some gold traders will, in fact, finally sell their gold. Unfortunately for them, they will have been late to the selling spree, since markets are generally forward-looking and the majority of the selling has already occurred over the past year.
Thus, any decline to come will likely represent the final low for the correction and, in fact, a better time to buy rather than to panic sell.
Again, markets are forward-looking. The Fed taper announcement has been expected for many months. Any final selling by worried gold holders should be terminal in nature.
Remember Gold’s 2015 Bottom
We need only look back to 2015 to remember the last time that the majority were fooled in gold at just the wrong moment.
Throughout 2014 – 2015, the markets began to price in the first Federal Reserve interest rate hike in nearly a decade. Gold traded lower this entire time, having fallen from its peak at $1,920 in 2011 down to a low of $1,080 in December 2015, just before the expected rate hike.
Although nearly all mainstream analysts were convinced of the theory that “rising interest rates are negative for gold, since gold offers no yield,” we went out on a limb at that time and said that the opposite was true: that the Fed interest rate hike would be positive for precious metals.
So sure were we of this thesis that the following article was published on December 9, 2015, just a week before the historic rate hike, titled ”Rising Interest Rates? Watch for Higher Gold Prices.” [link: https://www.gold-eagle.com/article/rising-interest-rates-watch-for-higher-gold-prices]
What happened when the central bank finally announced the historic rate hike, December 2015?
Gold fell for 24 hours following the announcement, and then bottomed on a dime at $1,046 per ounce.
Gold then began rising… and hasn’t looked back since.
The moral of the story?
The last traders who sold gold on the Fed interest rate hike were too late. The market had priced that rate hike in months and years ahead of time. Many gold investors sold at the exact bottom.
Back to the Present
Similarly, coming up this week, the Fed is expected to announce a taper of its Coronavirus $120 billion per month bond buying program.
Many mainstream sources believe this policy change will be negative for precious metals, due to a lowering of the inflation amount.
However, markets are forward-looking, and have been pricing this scenario in for months now; all the while, gold has been weak.
Any final capitulation selling which occurs in the days following the Fed meeting on Wednesday is likely to represent a significant bottom for gold, and investors should be using the weakness to their advantage.
Gold Eagle News: https://www.gold-eagle.com/article/gold-price-forecast-all-eyes-fed