Gold retreats from three-month high on decreasing China demand amid recent price rally

Gold retreated from three-month-high as a five-day advance hurt Chinese demand and after the new Federal Reserve Chairman Janet Yellen said yesterday the central bank will continue scaling back its stimulus in measured steps. Meanwhile, assets in the SPDR Gold Trust, the biggest bullion-backed ETF, rose on Tuesday, after being unchanged for four days.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in April traded at $1 285.90 per troy ounce by 09:35 GMT, losing 0.3% for the day. Prices touched a session high at $1 288.20 per troy ounce, while day’s low was touched at $1 284.10 an ounce. Yesterday, prices touched $1 293.70 per troy ounce, the strongest level since November 8, capping a fifth day of advances, the longest winning run since August 2012.

Gold futures are up 6.7% this year after a slump in emerging markets boosted demand for haven assets. However, the precious metal settled last year 28% lower, the steepest annual decline since 1981 as investors lost faith in the metal as a store of value and amid speculation Fed will continue scaling back its monetary stimulus throughout 2014.

“Physical buyers are very sensitive to price changes so it’s no surprise if demand slows,” said Lv Jie, an analyst at Cinda Futures Co., a unit of one of four funds in China created to buy bad debt from banks, cited by Bloomberg. “ETF flows appear to be stabilizing and bullion investors seem to interpret Yellen’s comments as neutral for the market.”

Chinese demand

On the Shanghai Gold Exchange, trading volumes for spot bullion of 99.99 percent purity declined yesterday, after reaching a nine-month high of 25 725 kilograms on February 10.

Chinese demand climbed 41% to 1 176.4 metric tons in 2013, compared to a year ago, data by the nation’s Gold Association showed.

According to data by the World Gold Council, China probably overtook India as the largest global consumer last year.

Fed stimulus outlook

Janet Yellen, in her first testimony to Congress as head of the Fed, said the central bank will “likely reduce the pace of asset purchases in further measured steps at future meetings”, if the labor market continues to recover and inflation rises.

Yellen underscored “continuity” in the Federal reserve monetary policy, emphasizing that she strongly approves the approach of her predecessor, Ben Bernanke.

The Fed Chairman also reiterated that the pace of cutting back Fed stimulus was not on a “preset course”.

The central bank announced its decision to reduce monthly monetary stimulus by 10 billion USD to 65 billion USD at the meeting on policy in January, underscoring that labor market indicators, which “were mixed but on balance showed further improvement”, while nation’s economic growth has “picked up in recent quarters.” Fed policymakers are to hold their next meeting on March 18th-19th.

The Federal Reserve will probably continue to pare stimulus by $10 billion at each policy meeting before exiting the program in December, according to a Bloomberg News survey of 41 economists, conducted on January 10th.

Meanwhile, assets in the SPDR Gold Trust, the biggest bullion-backed ETP, rose to 798.85 tons yesterday, after holdings were unchanged for four days. The fund has lost 41% of its holdings in 2013. A total of 553 tons has been withdrawn in 2013. Billionaire hedge-fund manager John Paulson who holds the biggest stake in the SPDR Gold Trust told clients at the end of last year that he wouldn’t invest more money in his gold fund because it isn’t clear when inflation will accelerate.