Gold falls on QE outlook, supported by China data

Gold fell on Thursday following yesterdays release of Fed minutes which revealed support among Fed members for tapering the central bank’s Quantitative Easing program through the end of the year. An unexpected increase in Chinas manufacturing sector supported the precious metal, suggesting stabilizing economic activity which boosted physical demand prospects.

On the Comex division of the New York Mercantile Exchange, gold futures for delivery in December traded at $1 364.80 per troy ounce at 8:02 GMT, down 0.39% on the day. Prices ranged between days high and low of $1 367.40 and $1 354.80 per ounce respectively. The precious metal plunged 0.72% on Wednesday, extending current weeks decline to over 0.8% after advancing 5% in the preceding two weeks.

Gold extended losses following the release of minutes from Federal Open Market Committee’s July meeting, which showed that most of the policy makers supported Fed Chairman Ben Bernanke’s timeline to taper the $85 billion bond purchasing program by the end of the year.

“Almost all participants confirmed that they were broadly comfortable with the committee reducing the pace of its securities purchases later this year,” the minutes revealed. Only some of the members stated that it is important to remain patient and evaluate additional information on the economy before making a decision regarding trimming Quantitative Easing.

Dollar-denominated commodities have largely been tracking shifting expectations for an earlier-than-expected deceleration of the central bank’s bond purchases, which have been pushing up commodities prices. An exit from Quantitative Easing would deliver a heavy blow to dollar-priced raw materials as it will strengthen the dollar, thus making commodities more expensive for foreign currency holders and limiting their appeal as an alternative investment. At the same time, gold is mainly used as a hedge against inflation, which tends to arise as central banks ease money supply, therefore stimulus tapering would cripple demand for the precious metal.

The dollar index, which tracks the greenbacks performance against a basket of six major counterparts, rose to 81.43 on Thursday at 8:02 GMT, marking a 0.09% daily gain. The September contract ranged between days high and low of 81.59 and 81.35 respectively. The U.S. currency gauge surged 0.48% on Wednesday and erased its previous weekly losses, extending current weeks advance to 0.10% so far.

According to a Bloomberg survey of economists, 65% of the participants expected that the Federal Reserve will start trimming its $85 billion per month bond purchases after FOMC’s September meeting.

Holdings in the SPDR Gold Trust, the biggest bullion-backed ETP, fell to 913.52 tons yesterday, bringing this years decline to 32%. Assets rose on a weekly basis for the first time since December last week.

The precious metal was supported however by prospects for a strong physical demand in the top two consumers. According to World Gold Council data, global bar and coin sales rose by 78% to 507.6 tons in the second quarter compared to a year earlier as demand in India and China, the world’s top two consumers, more than doubled. Jewelry demand increased by 47% to 575.5 tons.

Sales of coins and bars will reach as much as 1 000 metric tons in the two countries by the end of the year as low prices and economic recovery spurred demand. China’s demand totaled 776.1 tons last year, while India consumed 864.2 tons, council data showed.

Another batch of upbeat China data reinforced signs that the worlds second biggest economy is stabilizing. The Chinese HSBC Manufacturing PMI, prepared by HSBC Holdings Plc and Markit Economics, surged to a four-month high of 50.1, signalling expansion that was based on a rebound in new orders. The figure outperformed analysts’ expectations for a surge to 48.3 from July’s final reading of 47.7, an 11-month low. The indicator added to promising reports for July’s factory output, retail sales and exports, providing positive signs that the world’s second biggest economy is stabilizing. China accounted for 11% of global oil consumption in 2012, making it the world’s second largest consumer.

Market players will also be keeping a close eye on the remaining U.S. economic data coming later this week to gauge the U.S. economys recovery pace. On Thursday, last week’s Initial Jobless Claims likely rose by 10 000 to 330 000, while the Markit Flash U.S. Manufacturing PMI for August is projected to have advanced to 54.0 from July’s 53.7. On Friday, July’s New Home Sales are expected to have declined to 0.490 million houses sold, down from 0.497 million in the preceding month.