Gold extends decline from 3-1/2-month high ahead of Fed minutes

Gold extended a drop from the strongest level in 3-1/2 months amid speculations Federal Reserve minutes will reveal Fed officials backing further stimulus reductions. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, remained unchanged for a second day, after capping three 5-day periods of advances last week, the longest run since August.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in April traded at $1 318.10 per troy ounce by 07:49 GMT, losing 0.48% for the day. Prices touched a session high at $1 322.40 per troy ounce, while day’s low was touched at $1 314.50 an ounce. On February 17, prices touched $1 332.20 per troy ounce, the strongest level since October 31st.

The yellow metal settled last 5-day period 4.1% higher, capping the biggest weekly gain since the period ended August 16. Gold futures are up 9.1% this year after a rout in emerging markets and signs of slowing US growth, 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.

“The long-term driver of gold is tapering,” said Steven Dooley, head of research at Forex Capital Trading Pty in Melbourne, cited by Bloomberg. In line with Janet Yellen’s comments before Congress, the Federal Reserve is “saying ‘we’re going to wind back on stimulus measures as per the tapering timetable and stick to that’,” he added.

Fed stimulus outlook

The Federal Reserve is scheduled to release minutes of its January policy meeting later today as market players are looking for clues about the pace and the size of future stimulus cuts, after manufacturing activity in the state of New York trailed estimates and US factory production decreased by the most since May 2009.

Janet Yellen, in her first testimony to Congress as head of the Fed, said on February 11, the central bank will “likely reduce the pace of asset purchases in further measured steps at future meetings”, but also underscored that the recovery in the labor market in the US is “far from complete”.

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

Yesterday, the index, which tracks the manufacturing activity in the state of New York, came in at 4.48 this month, defying analysts’ estimates of a drop to 9.50 and after the index climbed to 12.51 in January, the highest since May 2012. In addition, the new orders index dropped to zero, after it reached 11 last month, the highest reading in two years.

A report by the Federal Reserve revealed on Friday that US factory production decreased in January by the most since May 2009, adding to signs that the recent severe weather conditions weighed on the US economy.

The index of industrial production, which gauges output in US manufacturing, utilities and mining sectors, decreased 0.3% in January compared to December, marking its first monthly drop since July 2013. Experts had anticipated that industrial production will expand 0.2% in January, after it increased 0.3% in December.

The capacity utilization rate in nation’s industry dropped 0.4% to 78.5% in January, while preliminary estimates pointed to a rate of 79.3%.

The Fed Chairman Janet Yellen cited the harsh winter and the unseasonably low temperatures as probable reasons for the weaker-than-expected US economic data, as the cold weather has affected activity in the labor market and elsewhere.

The Federal Reserve trimmed its monthly bond buying program from $85 billion to $65 billion after two $10 billion cuts. The central bank announced in December that it will pare monthly bond-buying purchases by $10 billion, after which it decided on another reduction of the same size 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.”

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.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETP, remained unchanged for a second day at 801.25 tons on Tuesday, after capping three 5-day periods of advances last week, the longest run since August. The fund has lost 41% of its holdings in 2013. A total of 553 tons has been withdrawn last year. 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. However, a government report revealed that the owner of the largest stake in the SPDR Gold Trust, kept his holdings unchanged in the fourth quarter of 2013.