Gold prices may fall if the Fed begins tapering QE3

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Gold prices may fall if the Fed begins tapering QE3
Gold is headed for its first drop in 12 years, even as international prices of gold have dropped by a fifth this year.

On Dec 18, the US Federal Reserve would conclude its two-day policy meet, more commonly called the Federal Open Market Committee Meet (FOMC).

It would take a decision on whether to taper its QE3 programme at this policy meet. Over the last few years the US Fed has been doing a QE3 programme or asset purchase programme. Currently, this programme unleashes around $85 billion into the US economy by way of bond purchases.

This adds more liquidity into the world economy which also find its way into asset classes like gold and equities.

The prime objective of such a programme is to push unemployment rates lower and support economic growth in the US.

Over the last few years this programme has helped gold prices to rally. Now, gold and to some extent equities face a threat as the US looks to partially withdraw its QE3 tapering programme. The US non farm payrolls data is fast improving and so is growth. Analysts are now estimating that the Fed would reduce its asset purchase programme by at least $10 billion this month. Should that happen it would suck some liquidity from the system and push gold prices could head lower in the international markets.

However, In India much would depend on how the rupee behaves. Normally, when there is tapering fears the rupee also falls against the dollar. When this happens gold prices do not fall in India as the falling rupee takes away all the benefits of falling gold prices.

Therefore, if gold prices fall internationally, and the rupee stays steady against the dollar, we can expect gold prices to reduce in India.

Read more about: gold, fomc, federal reserve
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