Fed Chairman Ben Bernanke announced Wednesday that the Federal Reserve would begin tapering its $85 billion monthly bond-buying program in January.
The $10 billion dollar monthly cut to the Fed’s purchases of Treasuries and mortgage-backed securities comes amid a series of positive economic indicators including a falling unemployment rate, higher GDP and improving housing numbers.
Bernanke stated that he expected further tapering at future meetings and hinted that interest rates would not rise before 2015.
Markets reacted to the news by jumping to record highs, which may seem counterintuitive to some.
“We didn’t get a pure tapering, we got two messages: one is they’re going to begin tapering in modest amounts and the other was that they’ve made it very clear that they’re not going to raise interest rates for a very long time,” says Jim Rickards, senior managing partner at Tangent Capital. “What the Fed is saying is ‘Don’t worry we’ve got your back, you can borrow money for as long as you want,’ and that’s what the stock market wanted.”
So why did the Fed decide to taper at all? Watch the video above to find out.
As for Bernanke, he’ll be passing the baton to Janet Yellen, who’s expected to be confirmed by the Senate as soon as today. She’ll most likely stay the course says Rickards.
“It’s a very high hurdle for [Yellen] to reverse course," but “she might because she’s more dovish than Bernanke and I expect a recession in 2014,” he notes.
While markets reached new highs on the news of tapering, gold continued its descent, falling below $1,200 an ounce. Rickards knows that the price of gold is down 30% from its highs but "on the physical side, the shelves are being stripped bare,” he says.
“China and Europe are just buying every ounce they can get their hands on and that actually makes sense," Rickards explains. "If the price is being suppressed because weak hands are dumping it or there’s manipulation in the market, you would expect people to buy it.”
When things turn around, says Rickards, “you’re going to find there’s no gold available.”
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