Gold futures fall to 2-week low as U.S. manufacturing activity growth hits 2-1/2-year high

Gold fell to the lowest in two weeks after the Institute for Supply Management reported U.S. manufacturing activity expanded at the fastest pace in two and a half years, indicating the 16-day government shutdown left factory output little affected. The data added to recently arisen speculations the Federal Reserve may begin trimming its monthly bond purchases earlier than previously estimated, shooting the dollar up to a 1-1/2-month high. Silver, platinum and palladium were little changed.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in December traded at $1 309.00 per troy ounce at 14:49 GMT, down 1.13% on the day. Prices slumped to session low of $1 305.80 an ounce, the weakest level since October 17, while days high stood at $1 327.30. The precious metal fell by 1.1% on Thursday, a third straight daily retreat, and extended its weekly decline to 3.1% on Friday.

Gold continued to edge lower after a larger-than-expected expansion of the U.S. manufacturing sector in October added to other recent upbeat data and fueled speculations the Federal Reserve might commence decelerating its quantitative easing program earlier than expected. According to the Institute for Supply Management, manufacturing activity in the worlds biggest economy rose at the fastest pace in two and a half years. The ISM Manufacturing index surged to 56.4, the highest since April 2011, defying analysts projection for a drop to 55.0 from Septembers reading of 56.2.

The U.S. dollar index, which measures the greenbacks performance against a basket of six major counterparts, traded at 80.80 at 14:46 GMT, up 0.59% on the day. The December contract surged to a session high of 80.84 minutes after the release of the report, the highest level since September 17, while days low stood at 80.32. The U.S. currency gauge added 0.7% on Thursday, a fifth straight daily gain, and extended its weekly advance to nearly 2% on Friday.

The strong manufacturing expansion in the U.S. was based on robust motor vehicle sales and the overall recovery in the housing market, despite recent downbeat data. The upbeat numbers suggested that the 16-day government shutdown in October had little or almost no effect on factory activity. According to data by Ward’s Automotive Group released earlier in the month, cars and light trucks sold at a 15.2 million annualized pace in September, down from 16 million in August, which was the most since November 2007.

The forward-looking new order index inched up to 60.6 from 60.5 in September but employment eased to 53.2 after surging to a 15-month high of 55.4 in September. The index tracking orders to be filled rose to 51.5 from 49.5 a month earlier. Production fell to 60.8 from 62.6.

ISMs report added to data released yesterday which showed manufacturing activity in the Chicago region expanded in October at the fastest pace in two and a half years as orders and production surged. The Chicago Purchasing Managers’ Index surged to 65.9 from 55.7 in September, confounding analysts’ projections for a drop to 55.0. This was the highest level of activity since April 2011 and the biggest increase in more than three decades. Orders rose to the highest level in nine years.

Gold sentiment remained dampened and the U.S. dollar continued to regain recently lost positions as policy makers announced after the conclusion of FOMC’s two-day meeting that they still see the U.S. labor market and economy as a whole as fragile but an underlying strength was notable. They seemed less optimistic about economic growth on Wednesday, and especially worried about the recovery of the housing and labor markets, pledging to maintain the current $85 billion per month bond purchasing pace until “the outlook for the labor market has improved substantially.”

However, policy makers noted there were signs of “underlying strength” in the economy and kept a tone which left the 16-day government shutdown in October and the possibility for a U.S. debt default on the sidelines, shifting focus to upcoming key data points. According to a Bloomberg survey of 40 analysts conducted on October 17-18, the Fed will begin scaling back its bond purchases in March. However, according to Citigroup, the odds for tapering in January rose to 45% from 25% following FOMC’s after-meeting statement. The precious metal has been tracking shifting expectations of Fed’s tapering timetable throughout the year and has lost 22% so far.