The gold price has been volatile since scraping a three-year low at the end of June, with traders taking their cues from the US Federal Reserve as to whether the Fed could “taper” its quantitative easing program as early as September. But fears of what could happen to the gold price if the central bank acts on its QE taper talk may be overblown, an expert says.
In a video interview with IB Times, David Williams, director of Strategic Gold, said both a tapering and non-tapering scenario would be good for gold. ”The taper is already baked into the cake,” he quipped.
If the Fed tapers, that would mean the economy is doing better and banks could end up loaning nearly $2 trillion in Fed funds currently sitting on their balance sheets, Williams explained. Factor in “fractional-reserve banking,” which allows a bank to make loans against its reserves, and that could mean 10 times reserves, or $20 trillion, flowing into the US economy. That amount of money would almost certainly be inflationary and good for gold and other precious metals that act as a hedge against inflation, said Williams.
On the other hand, if the Fed decides not to taper, meaning it continues to print $85 billion a month to purchase mortgage-backed securities, that would also be bullish for precious metals because the US dollar will fall and gold will rise, Williams said. He believes that any tapering is not likely to take place before the end of the year.
Williams’ thoughts on gold and QE come as the precious metal hit an 11-week high on Tuesday amid US saber-rattling over Syria, combined with expectations that QE could be prolonged.
“Geopolitical tensions in Syria are one of the factors which will be supporting gold prices in coming sessions,” Reuters quoted one analyst as saying. “And you also have the latest data out of the United States over the past couple of sessions that was relatively weak and raised the question mark over the timing of the U.S. Fed tapering.”
Western military intervention in Syria appeared more likely on Tuesday after US officials said growing intelligence points to Bashar Assad’s government as the culprit in a chemical weapons attack that killed hundreds, according to The Associated Press. Defense Secretary Chuck Hagel said the military is ready to strike if President Obama gives the order, the news outlet reported.
Geopolitical tension generally boosts the appeal of gold and other safe-haven assets, including the US dollar and the euro, while having the opposite effect on equities. The S&P/TSX Composite Index (TSX:OSPTX) fell 169 points on Tuesday, or 1.33 percent, while the Dow Jones Industrial Average (INDEXDJX:.DJI) shed 170 points. In London, where the British government is weighing involvement in the crisis, both the FTSE 100 and the AIM market lost points on Tuesday, while the German DAX (INDEXDB:DAX) was down by 2.28 percent.
Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any company mentioned in this article.