Gold and silver are once more trading up ahead of the all-important FOMC statement expected to be made sometime this afternoon. US stocks continue to slide as an increased amount of investors begin to come to terms with the fact that easy money in the US is on its way out. Moves by some foreign central banks to stabilize their currencies were made overnight and were met with a mixed reaction. In all, markets have calmed down in comparison to last Friday and the first two days of this week, but with the Fed’s statement this afternoon that all might change.
Easy Money On Its Way Out, Market Reacts
If you can recall back to December, the Federal Reserve of the United States made a landmark decision to pull the reigns on its longstanding monetary policy, also known as Quantitative Easing. The first decision to cut back on the policy saw bond-buying by the Fed be reduced by $10 billion per month. Now, barely a month later, the Fed is looking more and more like they are going to replicate December’s decision and cut back on QE by another $10 billion. This means that in the span of a little more than a month the QE policy of the United States has been decreased from $85 billion bond purchases per month down to $65 billion. While this is a significant decrease in monthly bond purchases, the moves made by the Fed are none too surprising as most of the market is and has been expecting to see QE reduced in some capacity. In all actuality, the life of QE as a whole is slowly being drained as many members of the Fed have made it clear that they would like to see QE completely abandoned by the end of 2014, so long as economic conditions permit.
All this taper talk is fine and good, but what does it mean for precious metals? At this point it is tough to say, but all signs are pointing towards the Fed’s tapering decisions being beneficial for gold and silver. The reason behind this is due to the fact that as more easy money flees the marketplace, liquidity not only in the US but around the world will begin to become an issue. As stocks become more difficult to cash in on investors will more readily seek out assets that are safe and reliable. To put it simply, safe-haven demand for gold and silver will rise as more investors cash in on stock gains and subsequently look to protect their money.
Coinciding with the decline of world stock markets is the pressure being placed on periphery currencies. The threat of more tapering in conjunction with recently poor economic data out of China is causing a massive sell-off of periphery currencies like the Turkish lira and the Indian rupee. In response to the early week sell off of mid-level currencies, central banks in Turkey, India, and South Africa have all raised their key lending rates in an effort to stave off deflation. As the day grinds on, the post-meeting statement by the Fed draws ever closer and is beginning to grip the world marketplace. Depending on what the Fed has to say, we may be in for an active afternoon and rest of the week.