Gold sinks to a two-and-a half-year low on QE outlook

Gold continued its steep decline in the early European session after yesterday Ben Bernanke, Fed chairman, announced that the central bank wont scale down its monetary easing program just yet, but that is highly possible to happen within the end of the year, provided the needed stable recovery signs. Also, Fed is likely to end its bond purchasing program around the middle of 2014, if key economic indicators, such as inflation and unemployment rate, are in line with projections.

On the Comex division of the New York Mercantile Exchange, gold futures for August delivery lost 4.82% on the day and traded at $1 307.75 per troy ounce at 9:05 GMT. The precious metal hit a 2 1/2 year low at $1 303.95 around 08:10 GMT, surpassing the two-year low of $1 321.95 that was touched in April.

Cailey Barker, an analyst at Numis Securities Ltd., wrote in a report today: “The gold price reacted badly. Here we are between a rock and a hard place where more QE is having less and less of an impact, but withdrawing QE is very likely to have a negative impact.”

Gold lost 22% of its value this year after tumbling in a bear market in April, followed by its biggest slump on April 15-16 as a result of investors losing confidence in the precious metal as a safe haven for wealth preservation. The precious metal has been priced throughout the year according to the shifting expectations regarding the future of Fed’s Quantitative Easing program as it is directly linked in an inverse relation to the dollar.

Jim Keenan, manager of BlackRocks high yield bond fund said in an interview: “I believe this Fed will continue to press its accommodative policy up until the point it is certain that it is not needed.”

Doug Elliott, a fellow at the Brookings Institution and former investment banker said that Fed will be very cautious about the timing of scaling back the monetary stimulus.”I basically trust the Fed to get the timing right and to communicate that pretty transparently and in advance. Every key official of the Fed remembers 1937. Bernanke doesnt want to come close to that,” referring to when the Fed reduced prematurely its monetary easing, which combined with spending cuts caused the economy to fall back into recession.

Although Bernanke said yesterday that Feds moves are tied to what happens in the economy and the central bank has no fixed plan, sentiment points at reducing bond purchases. Bernanke said that if the economy continues to improve in line with Feds projections, it would be “appropriate to moderate the monthly pace of purchases later this year”, and end the program as the unemployment rate drops do 7%, which Fed expects to happen around mid-2014.

James Steel, an analyst at HSBC Securities (USA) Inc. said: “The gold market reacted swiftly to the slightly more upbeat comments. The improved forecast signal a reduction in downside risk to the economy and gives the FOMC a more hawkish spin, which should also be USD bullish. This combination is outright gold bearish and we expect to see further pressure on prices in the near term.”

Earlier during the week Gold prices slumped as decent U.S. data showed a stable and low rate of inflation, which pressured the precious metal as it is mainly used as a hedging tool against inflationary effects. Core CPI, which excludes the more volatile energy and food prices, rose only by 0.2% compared to 0.1% in April and met projections. On an annual basis Core Consumer Price Index also met expectations and remained the same compared to May 2012 at 1.7%. CPI for May was even lower than anticipated and stood at 0.1%, below forecasts for a 0.2% increase.

Elsewhere on the precious metals market, silver, platinum and palladium are all following golds deep plunge. Silver for July delivery is down 4.32% for the day, standing at $20.688. Platinum July futures traded at $1 408.35 an ounce at at 7:06 GMT, down 1.09% on the day, ranging between days high and low at $1 419.10 and $1 398.90. Palladium for September delivery slipped 1.32% to trade at $687.20 an ounce, touching daily high and low at $695.80 and $685.20 respectively.