Fed Tapering - Here's What To Expect In The Gold Market

by: Boris Mikanikrezai

Gold December is trading today at $1,350 an ounce, declining 19% this year amid market expectations that the Fed will taper its $85bn a month of bond-buying as the economy improves.

According to the FED POMO schedule released by the US government, it is very unlikely that the FED will taper its bond purchasing program in September since the Desk plans to purchase approximately $45 billion in Treasury securities over the month of September. Moreover, nonfarm payrolls increased by 169,000 jobs last month under expectations of 180,000 so it implies that the economic growth may have slowed a bit in the third quarter. Nonetheless, most economists believe that the FED will announce a taper of about $10bn in September in survey published by Reuters. Indeed, nearly three-quarters of the 69 economists polled after Friday expect the Fed to announce a taper to its quantitative easing (QE) program after its September 17-18 meeting. They expect that Bernanke will taper just slightly to monitor the reactions on the markets. So both most economists and I agree that the goal of the FED is to make sure that the markets (including the gold market) will not be shaken by its announcement.

Consequently, gold prices should move sideways in the coming days ahead of the FOMC meeting on September with a slightly lower trend as first, more and more economists are convinced that the FED will taper and second, the geopolitical tensions seem to decline.

On the specific day of the FOMC meeting, I expect nonetheless strong volatility because many hedge funds will make their bets just before Bernanke speech to end up with a weekly performance (09/16/2013-09/20/2013) quite flat. I suspect that moments before the FOMC meetings, speculators will try preemting a bearish scenario and sell gold aggressively but the market will surge back higher in the end of the day.

Investors need to understand that the FED is deeply thinking about exiting from its current, very loose, monetary policy because Bernanke is aware that maintaining such a policy could destabilize the financial markets eventually. In the meantime, the Fed is also paying a close attention a taper may have on asset prices.

To sum up, the FOMC meeting is not likely to determine a trend for gold but just raise in the short term the volatility in the market. In the same way, most investors believe that gold is going to increase very likely if tensions in the Middle East occur. I agree that gold prices may spike very sharply in that case but just in the short term because investors will play the "fear trade" scenario. In the long term gold prices are driven by very different factors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.