Daily Nugget: Bernanke Signs Off With Tapering, Will Gold Test $1200?

Yesterday the Bernanke and the Fed took many surprise and announced ‘Dectaper’. Yes, they have reduced the monthly rounds of bond buying by $10 billion to $75 billion.

Note, this is tapering not tightening. The gold price was quick to pick up on this and the downside was limited having come under pressure following the announcement. Equities surged following the release of the Fed’s statement, pleased at how accommodative the FOMC appears to be. The Dow Jones closed nearly 300 points higher.

Immediately following the release of the statement and decision, gold traded higher in the proceeding ninety minutes i.e. during Bernanke’s press conference. However as Bernanke’s time came to an end, the gold price changed direction.

In Bernanke’s last ever press conference following an FOMC meeting he was quick to reassure the press that interest rates would not be going up for some time. Even if unemployment falls to the 6.5% target it will be some length of time after reaching this point that interest rates will be increased from their current near-zero values.

The gold price may test $1,200 in the coming weeks, possibly touching $1,100 at tapering goes on into 2014. In the short-term however gold’s immediate reaction to tapering shows it is unlikely to deepen the current annual loss.

Market participants will now be looking for key signs of inflation in the apparently recovering economy. Inflation continues to be seen as a bullish environment for gold and Bernanke made it clear that the FOMC are looking to encourage inflation.

Whilst Bernanke reassured markets that interest rates will remain low for some time, as they are gradually increased this will work in gold’s favour as investors pull out of equities.

Overall I believe the tapering news is bullish for gold. The Fed continues to pump over $900 billion into the US economy on an annual basis. The markets are aware of this but have been focusing on tapering for most of the year. Now that the announcement has come, participants can start to focus on other factors. This may provide a more balanced view for gold, such as the other rapidly expanding central bank balance sheets.