Gold weekly recap, October 28 – November 1

Gold tumbled to a two-week low on Friday and settled at the lowest price since October 22 after the U.S. dollar received a boost by a string of upbeat economic data which fueled speculations the Federal Reserve may begin scaling back its monthly bond purchases earlier than expected. Silver and palladium closed the week lower, while platinum slightly rose.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in December fell for a fourth consecutive day on Friday and settled at $1 315.90 per troy ounce, down 0.6%. The contract plunged to a session low of $1 305.80 per ounce, the weakest level since October 17 and closed the week 2.6% lower, the biggest weekly loss in seven. The metal rallied 6.1% in the preceding two weeks.

Gold extended its decline on Friday as the U.S. dollar rallied to a 1-1/2-month high after a string of upbeat data, which fueled speculations the Federal Reserve might commence scaling back its bond purchases earlier than previously projected. The Institute for Supply Management reported that manufacturing activity in the world’s 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 September’s reading of 56.2.

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.

The U.S. dollar index, which measures the greenback’s performance against a basket of six major counterparts, rose by 0.59% to 80.80 on Friday, a sixth straight daily advance. The December contract surged to a session high of 80.87, the strongest level since September 17, and settled the week 1.94% higher. Strengthening of the greenback makes dollar-denominated commodities more expensive for foreign currency holders and limits their appeal as an alternative investment.

ISM’s report added to data released on Thursday 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.

The metal was pressured earlier in the week after the Department of Labor reported on Thursday that the number of people who filed for initial unemployment benefits in the week ended October 26 fell by 10 000 to 340 000, slightly underperforming the median estimate of analysts surveyed by Reuters for a drop to 339 000.

The four-week average, which irons out weekly volatility, rose to 356 250 last week from 348 250. The average reading before the fiscal deadlock and the computer issues in California stood at 305 000 claims filed, indicating that the 16-day government shutdown in October had a negative impact on the labor market, but the effects seemed to be diminishing.

The employment data added to policy makers’ overall sentiment that the U.S. labor market and economy as a whole are still fragile and need to recover further, but an underlying strength was notable. Fed officials 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 21% so far.

Erica Rannestad, precious metals analyst at the CPM Group, said for CNBC: “Overall, investors have expected a reduction in monetary easing. So, even though there have been no changes effective this year, the market is selling off in anticipation of Fed tapering eventually.”

Assets in the SPDR Gold Trust, the biggest-bullion backed ETF, fell to 866.32 tons on Friday, the lowest since February 2009 after remaining unchanged for five days at 872.02 tons, data on the web site showed.

Physical demand

Gold’s slide is expected to be limited amid broad expectations physical demand will rebound after the precious metal’s recent losses. However, purchases in India, the world’s biggest consumer, are expected to decline during this year’s festival season after the Indian government introduced higher taxes and limitations to gold imports earlier in the year as a measure to battle a record current-account deficit.

According to the All India Gems & Jewellery Trade Federation, purchases of coins and bars may fall to 25% from what consumers bought a year earlier. India’s Commerce Ministry said earlier in the month that purchases of gold and silver fell to the equivalent of $800 million in September, down from $4.6 billion during the same period in 2012.

However, consistent demand from China, currently the second-biggest consumer, continued to limit losses. The country’s net imports from Hong Kong remained over 100 tons for a fifth consecutive month in September, keeping the country on track to overtake India as number one consumer this year. Net inflows fell to 109.4 metric tons last month from 110.2 in August, according to Bloomberg calculations. Nevertheless, the total amount in the first three quarters more than doubled to 826 tons from a year earlier. According to the World Gold Council, China’s total consumption may jump by 29% to over 1 000 tons by the end of 2013, becoming the largest consumer.

Elsewhere on the precious metals market, silver futures for settlement in December added 0.06% on Friday and settled at $21.880 per troy ounce. The metal plunged to session low of $21.710 an ounce, the weakest level since October 17, and closed the week 3% lower. Platinum for delivery in January rose by 0.5% on Friday to $1 455.20 per troy ounce and settled the week 0.1% higher. Palladium December futures surged 0.5% on Friday to $740.50 per troy ounce. The contract plunged to a two-week low of $732.80 an ounce and settled the week 0.3% lower.