Gold futures plunge to 5-month lows amid strengthened US economy outlook

Gold extended losses on Wednesday on reinforced speculations the Federal Reserve may reduce its monetary stimulus earlier than expected as the US economy outlook brightened. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were further reduced to the lowest since January 2009, adding to bearish sentiment. A stronger dollar further pressured gold.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February fell by 0.73% on daily basis to $1 211.90 per troy ounce by 08:12 GMT, the lowest since July 5th. Gold traded at $1 215.30 per troy ounce by 08:53 GMT, while days high stood at $1 224.20 . Gold plunged 5.3 percent in November, the most since June when prices touched a 34-month low of $1 180.50 per troy ounce, and the biggest drop for a November since 1978.

The precious metal has fallen 28% so far this year and is heading for the first annual drop since 2000 as investors lost faith in the metal as a store of value amid a rally in U.S. equities to a record and muted inflation.

Fed stimulus outlook

Recent upbeat readings from the U.S. signaled the the nation’s economic recovery proved to be sustainable and reinforced speculations about an earlier-than-expected reduction in Fed’s monetary stimulus.

The Institute for Supply Management reported yesterday that manufacturing growth in the U.S. accelerated to the highest in 2-1/2 years. The ISM Manufacturing index surged to 57.3, defying analysts’ projections for a decline to 55.0 from 56.4 in October.

The report showed activity in the manufacturing sector expanded for a sixth consecutive month and the overall economy grew for the 54th straight month. The new orders, production, employment and inventories sub-indexes also advanced, while supplier deliveries slowed.

The New Orders Index increased in November by 3% to 63.6 and the Production Index jumped by 2% to 62.8. The Employment Index posted at 56.5%, an increase of 3.3% compared to October’s reading of 53.2. This reflects the highest level since April 2012 when the Employment Index registered 56.8%. Supplier deliveries fell to 53.2 from October’s 54.7.

Investors will also be keeping a close watch on the upcoming release of crucial U.S. economic data to further gauge whether the Federal Reserve will commence scaling back its monthly bond purchases earlier than expected.

Later today, the US will release the ADP report on private sector job creation. Projections point to 170 000 new employees been hired in November, compared to 130 000 the preceding month.

On Thursday, December 5th, the preliminary US GDP for the third quarter is expected to be revised upward to 3.1%, up from initially estimated at 2.8% in October.

On Friday, December 6th, the Labor Department will release the keenly anticipated data on non-farm payrolls and rate of unemployment for November. According to analysts’ projections, numbers will probably show that US employers hired 183 000 workers in November, compared to 204 000 in October. This will be the largest annual gain in payrolls since 2005. Meanwhile, the unemployment rate is projected to lower to 7.2%, the same rate as in September and the lowest since November 2008.

Payrolls “is going to be the key number to come out, and if we see a print above 200,000 jobs then I think we could see gold test $1 200. We’re seeing relatively strong buying out of Asia fighting against this sentiment in the western world that we’re going to see a Fed tapering”, said Jordan Eliseo, chief economist at Sydney-based ABC Bullion, cited bu Bloomberg.

The FOMC’s October meeting minutes pointed that Federal Reserve officials may reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves. Central bankers are set to reconvene on December 17-18th.

Last month, a survey by Bloomberg revealed that the Fed will probably trim its asset purchases to $70 billion from $85 billion at its March 18-19th meeting.

Demand prospects by the two largest buyers of the precious metal, India and China, are being closely watched by investors, with India stabilizing its currency, after a sharp devaluation earlier this year. The Indian government also supported the jewelry industry, which is among the largest exporters, by reducing import costs.

A stronger dollar further pressured gold. The U.S. dollar index, which measures the greenback’s performance against a basket of six major peers, was up by 0.08% on Wednesday to reach 80.69 at 08:54 GMT. The December contract held in a day’s range between 80.77 and low of 80.59 and was slightly on the upside on weekly basis. The index settled last week mostly unchanged after falling by 0.75% in the preceding two weeks. Strengthening of the dollar makes commodities priced in it more expensive for foreign currency holders and limits their appeal as an alternative investment.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were further reduced to 841.41 tons on Monday, the lowest since January 2009. Outflows have totaled nearly 466 tons this year. Billionaire hedge-fund manager John Paulson who holds the biggest stake in the SPDR Gold Trust told clients on November 20 that he wouldn’t invest more money in his gold fund because it isn’t clear when inflation will accelerate. US inflation is still well below the Fed target of 2.00%.