Gold Intermarket: Downsizing of Fed balance sheet could hurt

Fed minutes due for release later today could show a discussion on the downsizing of the Fed balance sheet. Interest rate hike coupled with downsizing of the Fed balance sheet would be a double blow for the yellow metal. 

Gold prices followed the unprecedented expansion of the Fed balance sheet size since 2009. However, prices topped out above $1900 in 2011 after markets realized the expansion of the balance sheet isn’t fuelling sharp rise in inflation. 

The metal dropped to a low of $1050 in Dec 2015 and currently trades around $1230 levels. The yellow metal could take a hit if the Fed does consider downsizing its $4.5 trillion balance sheet. 

As of now, the Fed continues to be a powerful buyer in the markets. During its five years of QE, the Fed has acquired $2.46 trillion in Treasury notes and bonds and $1.75 trillion in mortgage backed securities (MBS). As these securities mature, the Fed buys similar securities as a replacement to keep the balance sheet from shrinking. 

The Fed may stop reinvesting and that would suck liquidity from the markets. Thus, dollar stands to gain, leading to losses in gold.