Hi all4one here is kitco news explanations of why tapering will hurt gold fyi
(Kitco News) - Gold is likely to suffer further whenever the Federal Open Market Committee starts tapering its quantitative easing program, although the metal may first claw back above $1,400 an ounce into September as some data are likely to remain soft and short covering sets in, said TD Securities Tuesday. Base metals are also likely to come under some pressure, the firm said. Platinum group metals, however, are expected to fare better as the market focuses on their expected tight supply/demand fundamental picture. Commodity strategists held a conference call with investors to address how they expect tapering to impact precious and base metals alike. This came on the first day of a two-day meeting of FOMC members, although TDS strategists say they expect a “dovish” outcome and for any QE tapering likely to be a few months away yet. Quantitative easing is the term the market has adopted for a program in which the Fed is currently buying Treasury and mortgage-backed securities at a rate of $85 billion a month, meant to push down long-term interest rates and thus underpin the economy. QE has driven gold higher in the past, but the metal is weaker so far this year as traders started looking ahead to tapering. “The very mention of QE tapering, or reducing the Fed’s participation in the bond market, has had a very dramatic impact on gold and silver, in particular,” said Bart Melek, head of commodities strategy at TDS. Spot gold has fallen from nearly $1,700 an ounce in January to below $1,400. The Fed upped its asset purchases late in 2012 at a time when there were fears that a protracted stand-off over the U.S. budget might mean the economy would fall off of the so-called “fiscal cliff,” a combination of automatic tax hikes and budget cuts that would go into effect if lawmakers did not come up with an agreement. A deal on taxes was made early in the year and the economy did not go over the “cliff,” although there has been a “bump in the road” to recovery, Melek said. “So far, the (QE) program has worked fairly well,” Melek said, citing an improving U.S. housing market and a rise in employment, although not as strong as most would like. The open-ended QE program kept yields low, not only reducing funding costs such as mortgages but with the flat yield curve forcing banks to increase lending. Meanwhile, gold has fallen as traders began factoring in an eventual unwinding or tapering of easing, although the move in this and bonds suggest the market has factored in something more severe, Melek suggested. “Tapering does not mean the Fed stops buying Treasurys altogether and starts unloading its massive holdings of about $3.4 trillion of assets onto the market,” Melek said. “Tapering means what the word suggests – to slightly take off the participation level in the bond market.” For instance, the Fed might cut back to buying $65 billion a month, Melek explained. This would still be “very accommodative,” as liquidity would keep increasing, albeit at a slower pace. “The market, I think, has mistakenly taken this to mean maybe something else, judging by the reaction of the bond market,” Melek said. “That had a horrible effect on gold.” Ten-year U.S. Treasury yields rose to as high as 2.27% from around 1.6% last month. This increased the so-called “opportunity cost” of holding a zero-yielding asset such as gold, Melek said. Opportunity cost refers to lost income, such as interest earnings, from holding an asset such as gold that does not pay interest or dividends. Gold Could Fall To $1,275 With Short-Covering Bounce First TD Securities looks for the Fed to start tapering this fall, perhaps in September. As a result, gold prices may fall back to around $1,275 and silver to $20. The TDS view is that 10-year yields will rise to around 2.45% by the end of the fourth quarter and around 3% next year, Melek said. “That suggests the opportunity cost of holding gold is likely to go higher and higher,” he said. Further, this would likely boost the U.S. dollar due to interest-rate differentials with other countries. This in turn hurts precious and base metals two ways, Melek explained. A stronger dollar makes them more expensive in other currencies, thus can hurt demand. Plus, a muscular greenback means overseas mining companies receive more of their own currency as payment, thereby offering an incentive for higher production.
