The Federal Reserve has stated that it would begin winding down its holdings of Treasury debt and mortgage-backed securities (MBS) in October.
The process is somewhat convoluted, with the Fed planning to allow up to $6 billion of Treasury debt and $4 billion in MBS to mature every month.
Those amounts will gradually rise to $30 billion per month of Treasury debt and $20 billion per month of MBS in 2018. Markets are somewhat skittish as the Fed begins this process.
“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,” said Trevor Gerszt, CEO of Goldco Precious Metals.
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 understand that stock markets have been driven to record highs as a result of the Federal Reserve’s quantitative easing programs. Dialing back on the monetary stimulus risks bursting the stock market bubble.
“Stock market valuations are at levels that, in hindsight, are usually associated with bubbles,” cautions Andrew Packer, editor of the Resolute Wealth Letter. “Taking some profits out of high-flying stocks and into relatively slower performers like precious metals makes a lot of sense here.”
“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, also a Newsmax Finance Insider.
"The outlook for gold remains bullish in 2017, as despite recent price retrenchment the yellow metal remains in the black for the year.
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.
“Under the right conditions, like a spike in inflation and a geopolitical shock, gold could rise past its old high of $1,900 and head to $2,500 or even $5,000. While that event is extreme, it isn’t as unlikely as it seems in the current market,” said Packer, also a Newsmax Finance Insider.
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