Two noted analysts say fear is stocking the equites market now that the Federal Reserve announced it would begin, this month, winding down the Treasury debt and mortgage-backed securities it owns.
The analysts posit that investors could turn skittish now that the Fed plans to let up to $6 billion of Treasury debt and $4 billion in MBS to mature every month without reinvesting the proceeds.
Those amounts will gradually rise, through 2018, to $30 billion a month of Treasury debt and $20 billion a month of MBS in 2018.
“This could finally put some fear into the markets,” said Andrew Packer, editor of the hard-asset-themed Resolute Wealth Letter. “Right now, stocks are priced for perfection, and any misstep here could give stocks their first correction in years.”
Trevor Gerszt agreed. The CEO of Goldco Precious Metals said, “What we’re seeing from the Fed is unprecedented. Central bank balance sheets have always trended upwards and never decreased. Since this is something that has never been done before, markets are understandably worried.”
Market reaction may depend on just how many securities the Fed actually allows to mature, which will likely take a few months to fully assess.
But many investors believe that the Fed’s action propped up stocks prices and that dialing back on the monetary stimulus risks bursting the stock market bubble.
“Investors who’ve been in stocks have seen great gains over the past couple of years, but they’re getting worried about maintaining those gains. That’s why many are starting to move their assets into gold,” said Gerszt. The outlook for gold remains bullish in 2017, as despite recent price retrenchment the yellow metal remains in the black for the year.
“Gold ended a five-year bear market in 2015. It posted gains in 2016, and it’s poised to do so again this year. Commodity rallies play out over years, so we’re still in the early innings of a gold rally,” said Packer.
Given the historical negative correlation between gold prices and stock market levels, any dips in stock market prices could drive up gold demand and prices.
“In the event of a stock downturn, we expect gold prices to rise just like they did during the financial crisis,” according to Gerszt. Gold prices rose from around $900 in October of 2008 to over $1,600 three years later.
Packer was even more bullish on gold’s price potential. “Under the right conditions, gold could even rally as high as $5,000 per ounce. We may not see that anytime soon, but such a move would provide huge returns to investors buying near today’s prices.”
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