Now let us look at the second tool, asset purchases. As stated above it should be dehomogenized from the interest rate policy, since it is a different tool, and the Fed has a lot of uncertainty about what it does. But let us dehomogenize this tool even further. Let us divide asset purchases by the Fed into two distinct categories: longer term government securities purchases and mortgage backed securities purchases. Here is the government chart:
As soon as we walked into 2009 the Fed started to back up the Treasury by buying more bonds (interestingly in 2008 the Fed was reducing government bonds holding to put them into banks’ hands, since these were almost literally the only “safe” securities one could hold on to at the time). As you clearly see there was no reduction in government bond holding since 2009 – this will be important when we contemplate tapering issues in the next section.
The nature of this move was good old monetary printing program in favor of the government. Quite frankly let us forget about all this central bank independence talk. Here it is. Since 2009 the monetary printing press has been spinning in order to bid up government bonds, to bring down real returns on them, so the government can receive extra created money in order to spend it for political benefactors.
Of course an increase in asset holding is not smooth and steadily increasing. No doubts we will have some slowdowns, but no reverse movements. From 500 billion dollars in 2009 to over 2 trillion dollars at the end of 2013.
Things look slightly different in case of commercial assets held at the central bank. As we’ve discussed in the recent Market Overview (on which this article is based), a sort of “tapering” in the commercial assets held by the Fed already happened. Therefore in case it should happen again it needs not change much in the current economic circumstances.
If we consider that only half of last week’s tapering meant a decrease in bond purchases, then the final effect is indeed quite small as far as the overall approach is concerned, and the stability of the dollar system. Consequently, over the long run the outlook for gold remains bullish, even if we see a decline in the next few weeks.