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Should Gold/Silver Owners Fear the Fed's Tapering?

Loose monetary policy

The implications of last week's Federal Open Market Committee meeting will continue to play out in the gold and silver markets this week. After months of talking about reducing stimulus, the FOMC announced they would take a tiny first step toward tapering in January. They will step back monthly purchases of mortgage securities and long-term U.S. Treasuries by $5 billion each.

Gold and silver spot prices, which were punished severely during the months of rumors about tapering, also suffered following last week's actual news. Now the question for metals investors is just how much of the Fed tightening has been priced in.

And there is another question regarding whether the Fed will be able to stay the course. Congressional Republicans, criticized by conservatives for feeble (and failed) attempts to hold the line on spending and lambasted by liberals for trying, are simply throwing in the towel. Massive federal deficits and the accompanying flood of new government borrowing appear set to continue indefinitely.

The Fed buys 80-90% of U.S. Treasury bonds – no matter if it must accept yields at historic lows and a government backing the bonds that cannot control spending. There does not appear to be other buyers ready to step into the Fed's place.

FOMC "Tapering" Is Not What They've Told You…

Janet Yellen, darling of the political left, takes position in Fed in January

Inflationist Janet Yellen will take the helm
of the Fed in January

The precious metals markets continue to behave as if Fed officials had dismantled their printing press and sold it for scrap! Yet we are still in an era of extraordinarily loose monetary policy.

For starters, the Fed will continue to create at least $75 billion per month (although the actual number will be closer to $83 billion). They could reduce stimulus by $10 billion three more times, and they would STILL be injecting markets with more cash than the prior iteration of Quantitative Easing (QE2). We'd like to remind people QE2 was breathtaking when it was announced in 2010. And Fed officials re-committed to maintaining the Fed funds rate at near zero for as far as the eye can see.

And then there is "super dove" Janet Yellen.

Investors should not forget that leadership will soon be changing at the Fed. "Helicopter" Ben Bernanke will exit into history as the most aggressive money printer to ever man the helm at the Fed. Nevertheless, his record of debasement will likely be exceeded by his successor.

Yellen, a darling of the political left, will succeed Ben Bernanke as Chairman of the Federal Reserve Board shortly. President Obama hand-picked the Berkeley leftist because she is in sync with his "redistribution of wealth" philosophy. The Fed shall continue as the great enabler of uncontrolled growth in Federal deficits and spending.

By all accounts, Yellen views monetary policy as a central planning tool to impose a social order, and she is no friend of a strong dollar or a disciplined monetary policy.

As a current Vice-Chair, Yellen often criticizes the Fed's unprecedented amounts of stimulus as inadequate and believes the central bank can do even more to promote job growth. In 2010, she floated the idea of taking the Fed funds rate, currently just above zero, into negative territory. Not only could banks be paid to borrow money, but such a policy could also force savers to pay a bank for simply holding their money!

Taken in context, the move to withdraw $10 billion per month in stimulus looks a lot more like a token effort than a serious first step toward monetary discipline. The smart money is betting on more money creation over the medium and long term -- not less.

Potential Market-Moving News This Week

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Expect a quiet news week in the markets. Money Metals Exchange offices will be closing early on Christmas Eve and closed Christmas day, but we're otherwise open during our normal business hours to answer your calls and help facilitate your year-end gold and silver transactions. And, as always, you may visit MoneyMetals.com at ANY time to place an order, get updated prices, or find a wealth of bullion related news and guides.

  • Monday, Dec. 23rd – Personal Income and Outlays. The most recent report on personal incomes showed a decline of 0.1% after showing strength in August and September. Of course, officials hope to keep people focused on the minor fluctuations from month to month. No one wants to talk about the tragic plight of real (inflation adjusted) incomes which have been in decline for decades.
  • Tuesday, Dec. 24th -- Durable Goods. Orders for big ticket items fell in October. Consensus is for improvement in the November report.

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