Gold jumps off after registering the worst annual drop since 1981

Gold advanced during the first trading session in 2014, after registering the worst annual decline in more than thirty years. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, remained at the lowest since January 2009, adding to bearish sentiment. A stronger US dollar put more pressure on the yellow metal. However, robust physical demand from China amid a slump in prices supported the market.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February rose by 1.71% to trade at $1 222.80 per troy ounce by 08:11 GMT. On December 31st, prices touched $1 181.90 per troy ounce, the lowest since June 28th, when the metal bottomed at $1 180.35 per troy ounce. The contract swung between day’s high and low of $1 228.10 and $1 204.40 an ounce respectively. The precious metal settled the year 28% lower, the steepest annual decline since 1981.

US economy outlook

Fed policy makers announced their decision to reduce bond purchases by $10 billion to $75 billion, on December 19th. Gold was further pressured after a recent series of unexpectedly upbeat economic data from the US supported Fed’s tapering decision and sent equities rallying.

On December 31st, US data revealed that consumer sentiment and home prices increased, adding to the confidence of the Feds tapering decision.

Fed’s balance sheet has swelled to almost $4 trillion as an attempt to revive the US labor market and put millions of unemployed Americans back to work. The central bank’s asset purchases will be divided between $40 billion in Treasuries and $35 billion in mortgage bonds, Bernanke said.

According to the median estimate of economists surveyed by Bloomberg on December 19th, the Federal Reserve may reduce the purchases in $10 billion increments over the next seven meetings, before ending the program in December 2014.

Holdings in gold-backed exchange-traded products fell by 33% this year to the lowest since 2009 as investors lost faith in the metal as a store of value as equities rallied, and inflation failed to accelerate. According to data compiled by Bloomberg, this year’s outflows of 864.8 tons were more than last three years’ combined inflows.

A stronger dollar put some pressure on the metal. The U.S. dollar index, which measures the greenback’s performance against a basket of six major peers, added 0.16% to trade at 80.29 by 21:00 GMT, on December 31st. The March contract held in a day’s range between 80.35 and 80.09. 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 ETP, remained at 798.22 tons, data on the website showed. The fund has lost 41% of its holdings in 2013. 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.

Chinese demand

Strong physical demand from China supported the yellow metal during the first trading session of 2014.

On the Shanghai Gold Exchange, the trading volume for bullion of 99.99 percent purity reached a one-week high of 13 144 kilograms on December 30th.

Wallace Ng, a trader at Gensha Metals Ltd. in Shanghai, said, cited by Bloomberg: “The market has been holding well above $1,200 and that’s driven by physical demand, we saw very good physical demand from China in December, which is likely to continue as we head into the Lunar New Year.” The Lunar New Year starts on January 31st.