Gold retreats after biggest daily advance in seven weeks as investors weigh Fed tapering

Gold fell on Wednesday, after yesterday it registered the largest daily advance in seven weeks as investors weighed Feds tapering prospects. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, remained at the lowest since January 2009 for a third day, adding to bearish sentiment. Increased Chinese physical demand relieved some pressure on the metal.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February decreased by 0.44% to trade at $1 255.50 per troy ounce by 09:18 GMT. Prices swung between day’s high and low of $1 261.10 and $1 253.80 an ounce respectively. The precious metal hit a three-week high of $1 267.30 per troy ounce yesterday and settled 1.81% higher , the largest daily gain since October 22nd. Prices touched $1 211.10 per troy ounce on December 4th, the lowest since July 5th and closed the week 1.8% lower. Last month, gold plunged 5.5 percent, the most since June and the biggest drop in November since 1978.

The precious metal has fallen 25% so far this year and is heading for the first annual drop in 13 years 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.

Victor Thianpiriya, an analyst at Australia & New Zealand Banking Group Ltd., said in a report, cited by Bloomberg: “Prices may find it hard to maintain yesterday’s momentum with Asian demand likely to taper off. Meanwhile, the clock is ticking down to next week’s FOMC meeting, and the question of whether or not tapering will begin remains.”

Fed stimulus outlook

On Monday, the President of the St. Louis Fed Bank, who votes on policy this year, said that the gains in the labor market increased the odds of Fed tapering. His colleague, Richard Fisher, President of the Fed Bank of Dallas added in a separate statement that the central bank should start trimming the bond buying program as early as feasible.

Comments came after much-better-than-expected US data was released on Friday. The Labor Department reported that unemployment in the U.S. fell to 7.0% in November, the lowest in five years, beating projections for a minor decline to 7.2% from October’s 7.3%. U.S. employers added more jobs last month than projected. Non-farm payrolls jumped to 203 000, confounding expectations for a retreat to 183 000 from October’s downward revised 200 000. The progress in the labor market will probably provide a spark for the US economy, analysts expected.

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.

The Federal Reserve may begin to scale back its 85-billion-USD monthly asset purchases at the committees policy meeting on December 17th-18th rather than wait until January or March, according to 34% of economists, participated in a Bloomberg survey on December 6th. In November’s survey, 17% of respondents projected a tapering in December.

Fed Reserve Bank of Atlanta President Dennis Lockhart said that any decision to taper should be accompanied by a limit on the size of the program or a timetable for ending it.

A weaker dollar supported the metal. The U.S. dollar index, which measures the greenback’s performance against a basket of six major peers, fell 0.04% to 79.94 by 09:14 GMT. The December contract held in a day’s range between 80.06 and 79.91, after yesterday it touched 79.84, the lowest since October 31st. The U.S dollar index settled last week 0.52% lower after falling by 0.85% in the preceding three weeks. Weakening of the dollar makes commodities priced in it cheaper for foreign currency holders and boosts their appeal as an alternative investment.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, remained at 835.71 tons for a third consecutive day on Tuesday, the lowest since January 2009. Outflows have totaled nearly 470 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%.

Chinese demand

Signs of increased China demand supported the market. On the Shanghai Gold Exchange, volumes for bullion of 99.99 percent purity, the benchmark spot contract, rose for a third consecutive day reaching 15 224 kilograms yesterday, the highest since November 28th.

China is poised to overtake India as number one consumer of bullion by the end of the year, with demand set to reach 1 000 tons, according to estimates by the World Gold Council.