The Federal Reserve Surprises With 'No Taper' Announcement

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Includes: GLD, IAU, PHYS, PSLV, SLV
by: Bob Kirtley

The Federal Open Market Committee met on Tuesday and Wednesday and decided not to taper Quantitative Easing (QE) not even by a small amount, so the $85 billion monthly bond-buying program remains in place until further notice.

Tapering would have represented a major turning point for the Fed in that it would have signaled the beginning of the end of QE and a reversal of monetary policy which provides financial stimulus; however, tapering appears to be off the table, at least for the near term. Although the Fed Chairman did say the following:

"We could begin later this year, but even if we do that, the subsequent steps will be dependent on continued progress in the economy, so we are tied to the data. We don't have a fixed calendar schedule."

Part of the rationale for not tapering appears to be the rise in long-term interest rates which could hamper this fragile economic recovery. This begs the question that if we cannot do it now, when, if ever, can we do it? As Ben Bernanke is due to step down in January, it may have been considered prudent to leave such changes to the new appointee. If Janet Yellen gets the nod, then we could be waiting for some time. Just imagine it; we could be discussing an increase to the Fed's balance sheet from the current $3.2 trillion to $5.0 trillion or so in a year or two.

The market in general reacted with a certain amount of volatility with the S&P500 trading up 20 points, closing at 1725 and the DOW up 147 points, closing at 15,676. The US dollar fell sharply on the news as this means the debasement of the dollar will continue.

The precious metals space reacted positively with gold gaining $55.00/oz to close at $1365/oz, silver gained $1.23/oz to close at $22.96/oz and the Gold Bugs Index, the HUI gained 22 points to close at 257. This is a gain of almost 10% for the HUI, achieved in just one trading session bringing with it much relief for both the producers and the long suffering investors.

The next couple of days will be crucial as we will see whether or not gold can build on today's performance, gain some momentum and put in a decent rally to higher ground. So far this year, we have seen this tiny sector take it on the chin as investors called it a day, cashed up and headed for the exit. Today's jump in prices may have caught their attention thus tempting them to re-allocate some of the funds to the precious metals sector.

Finally we will take a quick look at the Gold Bugs Chart, the HUI, which indicates what a tough year it has been so far, along with today's dramatic jump in prices. Also note that this is the second higher low that has been formed which is a positive sign. We now need to see the HUI follow through with a new higher high, and then things will look a lot better for the future prospects of the miners.

Click to enlarge

As a cautionary note there is still a lot to do to get back to the '600' level which is where we were at in September 2011 and as they say; one swallow does not make a summer, so go gently, it's still treacherous out there.

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