Gold prices fell sharply on Thursday as relative optimism about a potential budget deal paired with strong economic news continued to stoke beliefs that the US Federal Reserve was close to announcing a taper to its quantitative easing program. It was the second straight day of declines for the precious metal, though much more severe as prices plunged almost 2 percent.
Gold Prices Sharply Down, Future Lower, Silver Lower Still
The price of gold was off almost 2 percent Thursday, following its 0.78 percent decline on Wednesday. Gold futures fell even farther, with gold for February 14 deliver off almost 2.5 percent, displaying what could be deemed a belief by the markets that the taper is coming before that point.
Silver prices also appeared to be caught up in the same churn to even greater effect as the spot price of silver was off nearly twice as much, falling over 3.75 percent. Futures prices moved consistently with gold, falling almost 4.25.
Taper Could Be Announced Next Week
While anticipation of a taper is nothing new, gold prices reacted sharply to new fears as well as global equities markets, with stocks in Europe and Emerging Markets both showing losses. With the Fed’s monthly meeting coming next week, it appears as though many are anticipating that a series of positive developments for the American economy will drive the Fed to begin gradually rolling back its stimulus program. This should strengthen the dollar by reducing inflation, which would in turn be a downward pressure on gold, which commonly moves inversely to the dollar.
However, as much as an anticipated taper is to blame, the ongoing uncertainty about said taper, stretching out months now, may be the bigger culprit.
"The jury is still out as to whether the announcement to start the tapering of QE will be made then, but arguably it's the uncertainty that's eating into markets right now," said Monex Captial Markets chief executive Patrick Latchford, in a note.
What Will Taper Announcement Mean?
Given that most analysts appear to have written off the taper as a foregone conclusion at this point, with the remaining debate coming over the timing, there’s some question as to just how much the negative effect on global markets will be. Given the negative pressure continued uncertainty has provided, some are even speculating that the relative certainty of knowing what the Fed’s approach will be could boost markets in the long run.
"So, what will tapering mean for equities in 2014? Possibly not much. Remember that tapering is data-dependent, so the Fed will not begin to taper QE unless it feels comfortable about the trajectory of the economy. Whatever negative fantasies Wall Street has about QE ending, it will only happen when evidence of a better economy is buttressed by higher sales and earnings for companies," said Saxo Bank’s head of equity strategy Peter Garnry in emailed comments.
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