Today's Fed Meeting and Gold Prices

Over the last several years, the move in gold prices have been more and more in sync with market perceptions of what actions will be taken by the world's major central banks.

For example, today's Fed meeting and its anticipated outcome has kept gold prices under pressure lately, with gold on Tuesday falling 1.2%.

The past few years has seen the Federal Reserve, European Central Bank and, most recently, the Bank of Japan flood the world's financial markets with money through bond purchases and other operations.

As this occurred, the price of gold floated higher on the sea of liquidity.

Gold soared 70% from the end of December 2008 to June 2011 through the first two rounds of QE (quantitative easing). Then after the announcement of the launch of QE3 last September, gold climbed to over $1,770 an ounce on the back of the Fed announcing open-ended purchases of bonds.

But that market perception all changed this year as various Federal Reserve officials began speaking about the Fed tapering its purchases of bonds from its current monthly rate of $85 billion.

Some traders are operating under the notion that taper is synonymous with stopping cold turkey. Hedge funds have rapidly cut their positions in gold in fear of the end of QE.

According to Bloomberg, bullish bets on gold in the futures market have nose-dived 78% since the record in August 2011. Holdings in gold exchange-traded products have dropped by 20% so far this year.

That's why one goal of Chief Bernanke at today's Fed meeting – according to The Wall Street Journal – will be to explain to Wall Street what the definition of "taper" really is.

Today's Fed Meeting

After today's Fed meeting, it is expected that Bernanke will explain that taper means to gradually reduce.

He will likely say that the Fed will merely reduce somewhat bond purchases over a period of time and is nowhere close to actually ending the program.

Economists seem to understand that even though Wall Street traders apparently don't. The median of 59 economists polled by Bloomberg estimates that the Fed will reduce its monthly bond purchases to $65 billion by October.

Edmund Moy, chief strategist at Morgan Gold, spoke about Fed policy with Marketwatch, "It's likely there will be no [major] changes in the short-term because their triggers (unemployment, etc.) have not been met."

Andrey Kryuchenkov, metals analyst at VTB Capital, told Marketwatch that Bernanke will not be hawkish, stating "We expect the Fed chairman to be at ease with his ongoing accommodative stance."

AMP Capital head of investment strategy, Shane Oliver, wrote Friday in a note to clients, "The Fed will only start to slow and then unwind its stimulus program when it's completely comfortable that the economic recovery is self-sustaining." He added that the Fed will stress that any "interest hikes are still a long way away".

So what does today's Fed meeting mean for gold prices long term?

With interest rate hikes a long way off being added to factors such as the Bank of Japan trying to outdo the Fed in money printing, the liquidity conditions still are supportive of gold – despite Wall Street short-term traders' overblown fears of the Fed going cold turkey.

For more on what the Fed meeting today means for markets, check out "Big Buying Opportunities" Created By This Week's Fed Meeting

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