Gold, interest rates on a crossroad on nearing stimulus halt

US Federal Reserve officials are planning a strategy for resizing the unprecedented $85 billion-a-month bond-buying program meant to spur the country’s economy. The exit of stimulus will not happen overnight, but will rather be a prolonged process. In both cases, interest rates are on the way up, while gold prices on the way down.

On Friday, gold price settled at $1447.20 an ounce at the end of the trading session, but earlier briefly touched $1419. Since the two-day sharp correction of around $200 an ounce from the middle of April, the yellow metal traded in a tight range, not able to break in either direction. Big money managers revised their gold and silver price forecasts for 2013 and 2014, but not in a drastic way yet. A few financial advisors project gold prices to reach extremely low levels of somewhere between $800 and $1000 an ounce. This seem rather exaggerated projection, as the higher gold price is already priced in commodity markets.

Read more: Big Money Managers Bearish on Gold

However, a decline in gold prices is expected to happen gradually, but not in a dramatic actions. US officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps. Stimulus purchasing will continue for some time, but it will correspond to the government’s confidence in the job market and inflation rates. The timing on when to start reducing the bond buying is not yet announced.

The Fed’s strategy for how and when to wind down the program is of intense interest in financial and commodity markets. While the strategy being debated leaves the Fed plenty of flexibility, it might not be the clear and steady path markets expect based on past experience.

Officials are focusing on clarifying the strategy so markets don’t overreact about their next moves. More or less, market participants were aware of the revival of the US economy since some time by now and such decision should not come as a big surprise to them and cause panic-driven reactions.

Stocks and bond markets have taken off since the FederalReserve announced in September 2012 that it would ramp up the bond-buying program. The major indexes in the US closed at another record Friday. An abrupt or surprising end to it could send stocks and bonds in the other direction, but a delayed end could allow markets to overheat. In all cases, panic buying or selling might be dangerous for market participants.

You may consider reading further :

Leave a Reply

Your email address will not be published. Required fields are marked *