For Whom The Bell Tolls...

​In a mild surprise - and a largely symbolic move - the FOMC today decided to trim monthly asset purchases they have been making through the QE3 program by $10 billion per month.

The equities markets love it. The dollar bulls love it. Bond bulls sort of love it. Oil likes it quite a bit.

Gold, however, seems to dislike the whole idea fairly heartily.

It is not the tapering itself that bothers gold traders, but rather the idea that the economy is improving without inflationary pressure. The Fed issued an economic outlook in its press release today that slightly increased the forecast for 2014.

It now expects the economy to grow at a 2.2% to 2.3% annual rate this year, up from its September forecast of 2% to 2.3%. It predicts the economy will grow 2.8% to 3.2% in 2014, vs. its previous projection of 2.9% to 3.1%.

Additionally, the Fed has promised once again to maintain low interest rates, which is not good for gold at the moment. Not only is it anti-inflationary, but it encourages the equities markets, which suck money out of gold traders' hands.

Surprisingly, there was only one dissenter against the beginning of tapering. 

Boston Fed President Eric Rosengren was that lone ranger. With unemployment still elevated and inflation well below the Fed's target, Rosengren believes that tapering "is premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate," the statement said.

There is much to be said for Rosengren's position. A 7% or even a 6.5% unemployment rate does not earn anyone a gold star at the top of the homework assignment. Inflation is utterly tame, a kitten, as they say. And the modest economic growth has to take into account all the lost years of the Great Recession. The U.S. - and the world - will be lucky to get back to even by 2018 at this rate.

Let's revisit the basic answer to the basic question as to why the Fed is doing asset purchases in the first place. From today's FOMC release:

"The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate."

And:

"...Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases."

The Fed balance sheet is now about $4 trillion and the tapering, if kept on course as is for a year, will mean that for 2014, the Fed will add $900 billion to the ledger rather than slightly over $1 trillion.

Just now it is hard to imagine fundamental news that would create a bullish atmosphere for gold. So, we will be looking at staying out of trouble when gold is range bound, and capitalizing on moves, presumably to the downside, when the opportunities arise. Of course, to identify and exploit those opportunities, we need to pay ever stricter attention to technical analysis.

As always, wishing you good trading,