Gold declines a third day following Fed minutes, SPDR holdings retreat

Gold declined for a third day on expectations the Federal Reserve Bank will keep cutting stimulus at each policy meeting, before exiting the program at the end of the year and as assets in the SPDR Gold Trust, the biggest bullion-backed ETF, shrank by the most in two months.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in April traded at $1 314.30 per troy ounce by 08:11 GMT, losing 0.46% for the day. Prices touched a session high at $1 314.80 per troy ounce, while day’s low was touched at $1 308.70 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 8.7% 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.

“Gold has historically benefited from easier monetary policies and the prospect of less loose monetary policies going forward is negative for gold,” said James Steel, an analyst at HSBC Securities (USA) Inc., cited by Bloomberg. While the precious metal is at risk of further consolidation, “we remain positive on bullion should it remain over the psychological $1,300 an ounce level and the 200-day moving average of $1,303,” he said.

Fed stimulus outlook

According to minutes of the Fed meeting on policy in January released yesterday, several Fed officials considered that in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor” of continuing to cut monthly bond-buying purchases in $10 billion increments at each policy meeting.

Fed officials pulled away from their commitment to consider raising interest rates when the jobless rate declines below 6.5%, the minutes showed. Policy makers also decided that they may revise their guidance soon as the unemployment is falling at a faster-than-expected pace, even though other labor market indicators appeared to be weaker.

Last month the unemployment rate fell to 6.6%, the weakest in more than 5 years, while other reports released last week revealed that industrial production and retail sales unexpectedly declined in January. Yesterday, data revealed that US home construction also slowed its pace in January, mainly due to the severe winter conditions.

The US Commerce Department reported yesterday that housing starts declined 16% to an 880 000 annualized rate in January, after December’s upward revised 1.05 million. The drop was the largest since February 2011. Analysts had expected that housing starts will drop to 950 000 units. However, the number of permits for future projects registered a smaller drop, which hints activity may stabilize as the weather conditions improve.

A separate report revealed that the number of building permits fell by 5.4% to 937 000 in January, after December’s figure was upward revised to 991 000. Analysts had projected a smaller decline to 975 000 units.

The slower-than-expected pace of US home construction can be attributed to the harsh winter and the unseasonably low temperatures, which probably played an important role in slowing projects. Construction in the Midwest declined to a record-low as the coldest January in 20 years probably limited groundbreaking as it plunged by almost 68% last month to a 50 000 annualized rate, the weakest level in data going back to 1959.

However, for all of 2013, builders began constructing 926 700 homes, the most since 2007, when builders began work on 1.36 million homes.

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.

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

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 central bank 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, were reduced by 0.7% to 795.61 tons yesterday, the largest decline since December 23rd. 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.