3 Reasons Gold Will Soar When The Fed Tapers

[GoldCore]

3 Reasons Gold Will Soar When The Fed Tapers

Gold and silver finally have some green colour to show instead of red on the pricing screens and has broken upwards out of the channel it has been in since mid-June and the highest it has been since the beginning of September.

The gold price has also moved sharply above both its 50-day and 200-day moving averages.

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The sideways channel started when the Fed began discussing ‘tapering’ in mid-June. However, now last week’s meeting put the ‘tapering’ plan into place, and gold is moving upwards out of the channel shown on the chart below.

 

Why Gold Will Soar?

To that end we are looking at 3 questions this week.

1. What does “tapering” mean and why does gold care? The term “tapering” became a buzz word in 2011 after the Great Financial Crisis. It refers to the process of central banks reducing the amount of assets they purchase each month.
   
   During the financial crisis many of the central banks reduced their policy rates to zero (or near zero) in 2008 but with the financial system still in turmoil these central banks started purchasing assets, mostly government bonds, but also assets such as mortgage-backed securities and corporate bonds to further support financial markets.
   
   By purchasing these assets, the central banks raise the prices of these assets, which means the interest rate yield is lower, and the central bank is adding money to the financial system. In theory these purchases are to put more money in the hands of financial institutions.
   
   This not only makes government debt “less attractive” (higher price and lower return) but also gives the financial institutions money to buy equities or lend additional money to companies or individuals thereby adding to economic activity.
   
   The gold market cares because central banks ‘tapering’ asset purchases is a form of tightening policy. Less money being added to the financial system each month.
   
   The gold market especially cares about the Federal Reserve (the US central banks) tapering plans, this is because the US is still the world’s reserve currency. As a result most commodities are priced (and delivered) in US dollars for example.
   
   After the Federal Reserve started talking about tapering its assets in 2013, government yields rose, and the gold price declined. This is the same effect that happened after the mid-June Federal Reserve meeting when the central bank started talking about tapering assets.
   
   Safe haven investors will tend to sell their gold investments for fixed income assets as the interest returns they can achieve increase (driven by higher interest rates).
    
2. What can we say about the recent gold price rally? This rally is still in the very early stages. The gold market could indeed stall out before another significantly higher price move. Interesting further milestones for confirmation of the rally are;
   • When the gold price 50-day moving average moves above the gold price 200-day moving average,
   • To see gold prices above the 2021 year-to-date high of just over US$1,900.
      
3. Where does all this leave silver; will it rally too, and when? The silver price has also moved higher in recent weeks, but remains below its 200-day moving average. In general, when the gold price rallies by 20% or more the silver price follows in 3-5 days. It rallies, on average by around 60% higher. 

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Nothing ever moves in a straight line, but now that the Fed has set its tapering strategy in place, combined with the pandemic exposed problems in labour markets and the exposed disruptions in supply chains, gold should thrive as inflation roots itself, especially since central banks choose to stay behind the inflation curve.

Meaning that even though central banks (again notably the Federal Reserve) are tapering asset purchases and will most likely start to raise interest rates next year that inflation will rise faster than the interest rate increases. Hence pushing real interest rates (inflation-adjusted) even further into negative territory.

Even more negative real rates will be good for the metals prices. This is because negative real rates mean cash is trash.

[beacon]

Good post.