Gold prices are under pressure as the market wonders what will happen to the price of the precious metal after next week’s two day meeting of the US Federal Reserve which is expected to start reducing its current round of quantitative easing.
Analysts say that the impact on gold prices will depend on just how fast the Fed starts its so-called tapering (reducing) of its $US85 billion a month.
Most in the markets expect the Fed to make an announcement about slowing the rate of easing – there are very few people who think a reduction of some kind won’t be revealed or explained by the key policymaking committee of the US central bank next week.
The flow of information about the health of the US economy has been solid and encouraging, from growth to investment and retail spending (an update is due on Friday).
The only thing that could see the Fed hold off or delay the tapering decision is the looming confrontation over the US debt ceiling by the middle of October.
In any case, should that happen, gold prices will rise as nervy investors look for safety while the debt argument is settled.
Gold futures prices this week have started to lose momentum as fears about the impact of a Fed decision kick in.
Prices hit a low on Tuesday of $US1,356 an ounce, the lowest for several weeks.
Gold was around $US1,363 in US trading this morning. Not helping was the obvious easing in tensions around the situation in Syria.
If the Fed does nothing next week (which is not really expected), gold prices will rise in relief, but that will merely postpone the impact because the Fed will end its easing program in the next year.
Analysts at Goldman Sachs say gold will extend a drop into 2014 as the Fed eases its rate of spending because such a decision may trigger a new round of spending, as we say in June.
“Gold prices will decline into 2014 on the back of an acceleration in US activity and a less accommodative monetary-policy stance,” the analysts wrote. “The September FOMC meeting, where our economists expect a tapering of QE3, could prove the catalyst to push gold prices lower."
Goldman Sachs said they were looking at a 15% fall in precious metals prices (which includes the more volatile silver, plus the industrial metals, palladium and platinum).
And analysts from Citigroup Inc., ABN Amro Group NV and Macquarie Group also see gold prices weakening as the Fed tapers. Societie Generale analysts see a possible end of year gold price around $US1,200 an ounce.
If the Fed starts tapering (Bank of America Merrill Lynch analysts suggest it could be a trim of up to $US15 billion in the monthly spend), then prices gold prices will only ease a touch.
The analysts say the US market is projecting the Fed to start cutting its spending by $US10 to $US15 billion a month.
But if it cuts $US30 billion or more, then gold prices could quite easily slide by up to 10%, to around $US1,250 an ounce, according to UBS.
That might be too much because Fed watchers expect the tapering to be achieved in small steps to start with, and gradually heading towards an end in the last half of 2014, even if the US unemployment rate continues falling.
BofA Merrill Lynch Global Research said yesterday that, “If the Fed is more dovish than that, i.e., tapers by less or delays tapering entirely, gold prices could rally in the short term. Yet, gains will in our view be limited, partially because real (interest) rates should continue trend higher in the coming quarters."
UBS analysts are also gloomy, and on Tuesday Joni Teves, an analyst at UBS, told CNBC in New York that prices could fall to around $US1,250 an ounce if the Fed starts tapering. “But I certainly wouldn’t rule out another attempt below $1,200 if, for example, the Fed is more aggressive than the market is currently expecting,” she said in the interview.
The Fed meets on September 17-18 (not 16 and 17 as reported this week) and according to other analysts, the central bank wants to make the market understand that the period of very loose monetary policy is ending and it had better get used to it.
The Fed move, which started on May 22 when chairman Ben Bernanke highlighted the possibility of a start to a tapering process, has seen interest rates in the US and around the world rise. US 10 year bond rates are around 3% (ours in Australia have climbed well over 4%). Some analysts have pointed out that when the Fed stopped its first two bouts of easing in prior years, market rates fell from the pre-decision run up. But that was a recognition of the softness of the economy.
The US economy is much healthier now than in 2009-11 when the two previous rounds of easing happened (if the economy was healthy back then, the second and third rounds of easing would not have been necessary). Interest rates eased immediately because of the softness, but this time the economy is growing steadily, demand is stronger and the housing sector especially, is much, much more vibrant.
Hence, there’s no real expectations of a rate fall, more a belief that rates won’t rise much further while investors assess how the Fed’s slow end to this round of spending is impacting confidence and prices.
But gold prices face a bit of a whack while this is happening, especially if there’s a continuing rise in the value of the US dollar, which has been slowly happening in the past five to seven weeks.
But that will be beneficial for golds and other commodity prices because the real level of demand will slowly reveal itself as the tapering slows and the Fed starts retreating.
