Gold erases daily gains on U.S. consumer inflation, FOMC meeting

Gold plunged back to negative territory as the Labor Department reported that U.S. consumer inflation barely rose in August, limiting demand for the metal as a hedge against inflation. The rise however pointed at stabilization in underlying inflation that supports Feds intention to trim its monetary easing program. The outcome of FOMCs two-day meeting starting today remained in focus.

On the Comex division of the New York Mercantile Exchange, gold futures for delivery in December fell by 0.30% to $1 313.80 at 13:58 GMT. Prices ranged between day’s high of $1 323.40 and low at $1 306.40, near yesterday’s 5-week low. The precious metal fell by 1% on Monday and extended its weekly decline following Tuesday’s minor gain.

Gold retreated after hitting a session high in European trading as the U.S. Labor Department reported that consumer prices rose by 0.1% in August, underperforming both projections and the preceding months 0.2% increase. The minor gain was based on a fall in energy prices but an increase in rents and medical care costs managed to push inflation up, which could allow the Federal Reserve to begin trimming its monetary easing program.

Year-on-year, the Consumer Price Index rose by 1.5%, mismatching expectations for a 1.6% advance after surging 2.0% in the preceding month.

The so called Core CPI, which strips out the more volatile energy and food expenditures, met analysts expectations and gained 0.1%, which however marked a slowdown from Julys 0.2% increase. Year-on-year, core consumer inflation also met projections and advanced by 1.8%, outperforming the preceding periods 1.7% gain. The steady rise on annual basis eased previous concern among Fed officials over underlying risks of disinflation that could occur if the central banks monetary stimulus gets pulled out too soon. Feds official inflation target stands at 2% and Chairman Ben Bernanke said that low inflation is temporary and expects it to pick momentum as the economy strengthens further.

A separate report showed that U.S. Treasury International Capital Flows rose to $56.7 billion in July after falling by $19 billion in June.

The dollar managed to recover some of its earlier lost positions following the inflation data. The dollar index, which measures the greenbacks performance against six major peers, rose to 81.37 at 13:54 GMT, down 0.06% on the day. The December contract fell to a session low of 81.26 minutes after the release of the data, while days high stood at 81.51. The U.S. currency gauge is marking a 0.4% weekly decline so far this week.

Gold has declined 22% so far this year and is set for its first annual decline in 13 years as investors lost faith in the metal as a safe haven for wealth preservation and as market players expected the Federal Reserve to begin decelerating its monetary easing program by the end of the year. The metal is mainly used as a hedge against inflation, which tends to arise when central banks ease money supply. Therefore, an exit from Feds stimulus program would deliver a heavy blow to golds demand prospects.

Gold is expected to remain very volatile before the outcome of FOMC’s meeting on September 17-18 and Fed Chairman Ben Bernanke’s statement after the end of the summit, Goldman Sachs predicted.

According to a Bloomberg survey conducted on September 6, the central bank will reduce its monthly purchases of Treasuries to $35 billion from $45 billion and keep mortgage-bond buying unchanged at $40 billion.

Gold drew some support on Monday as Lawrence Summers, Treasury secretary under President Bill Clinton and former top aide to President Barack Obama, withdrew from consideration to succeed current Federal Reserve Chairman Ben Bernanke. This boosted speculation that the end of the program might be deferred as Summers was expected to tighten Fed policy more than his potential opponent Fed Vice Chairman Janet Yellen.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETP, remained unchanged at 911.12 tons yesterday, data on the web site showed.

Gold was also pressured as receding tension in the Middle East curbed safe haven demand. The metal managed to partially recover and hit a three-and-a-half month high on August 28 as what was seen as an imminent U.S.-led attack against the Syrian regime stoked safe haven demand. However, fading fears curbed demand as the U.S. and Russia struck an agreement to put Syria’s chemical arsenal under international control and avert military action.