Gold at three-week low on Fed stimulus outlook

Gold fell to a three-week low on Wednesday amid speculation Fed will begin tapering its monetary easing program in the second half of the year and most likely after FOMCs September meeting, according to Fed Chicago President Charles Evans.

On the Comex division of the New York Mercantile Exchange, gold futures for December delivery traded at $1 278.10 per troy ounce, down 0.34% on the day. Prices ranged between days high at $1 283.30 and low of $1 272.20, the lowest since July 18. The precious metal fell 1.68% on Tuesday, extending current weeks decline to over 2.4% after plunging 1.66% the previous week.

Gold continued to fall on Wednesday as Fed Bank of Chicago President Charles Evans, who was one of Quantitative Easings supporters, said yesterday that there has been a “good improvement” in the labor market and indicated the central banks monetary easing program might be decelerated in September. FOMCs next meeting is scheduled for September 17-18 when policy makers will review their assessment on the economic recovery pace.

This comes after Federal Reserve Bank of Dallas President Richard Fisher, one of Quantitative Easing’s critics, commented this week the central bank is getting closer to tapering the monetary easing program. He said in a speech in Portland, Oregon: “Financial markets may have become too accustomed to what some have depicted as a Fed ‘put. Some have come to expect the Fed to keep the markets levitating indefinitely. This distorts the pricing of financial assets” and can lead to “serious misallocation of capital.”

Comments of Fed officials were backed by upbeat U.S. data this week, which offset the unexpectedly disappointing payrolls on Friday. The ISM reported on Monday that the U.S. services sector rose with a lot faster pace in July than in June, hitting a five-month high. The ISM Non-Manufacturing Composite index surged to 56.0, well above analysts’ expectations for a jump to 53.1 from June’s 52.2 figure. Sixteen out of eighteen sectors that are tracked for the preparation of the index have marked an expansion in July, compared to fourteen in June. This boosted the U.S. economy’s recovery prospects, spurring speculation Quantitative Easing may after all be tapered in September, as many analysts project.

On Tuesday, The Commerce Department reported at that the U.S. trade deficit narrowed in June to $34.220 billion, exceeding analysts’ forecast for a drop to $43.5 billion from May’s downward revised reading of $44.1 billion. Statistics showed that U.S. exports rose by 2.2% to $191.2 billion, while imports decreased by 2.5% to $225.4 billion.

As a result, assets in the SPDR Gold Trust, the biggest bullion-backed ETP, fell to 915.04 tons yesterday, a new low since February 2009.

David Lennox, a resource analyst at Fat Prophets in Sydney, said for Bloomberg: “The market’s still fretting about what the Fed’s going to do with QE. We’re starting to see a crescendo of comments from officials.”

Gold has fallen more than 24% this year on speculation the Federal Reserve will trim its bond purchasing program in the second half of the year and bring it to an end by mid-2014. The metal is used mainly as a hedge against inflation, which accelerates when a central bank eases money supply. An exit from a program such as Quantitative Easing would deliver a heavy blow to gold’s price as its demand will crumble. According to a Bloomberg survey of analysts last month, fifty percent of the 54 economists expect Fed to taper its Quantitative Easing program in September.

Market players are looking ahead at this week’s U.S. data to further gauge the recovery pace of the world’s top economy. On Wednesday, U.S. Consumer Credit indicator will likely show a decline to $15 billion in June, down from May’s $19.615 billion. Thursday’s Initial Jobless Claims are expected to have risen by 9 000 to 335 000 in the week ending August 3.