Gold falls on Fed tapering worries as US lawmakers reach budget agreement

Gold fell on Thursday on increased bets for a reduction in Feds assets purchases after US lawmakers reached a compromise on a two-year budget accord that would lift the fiscal uncertainty. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were reduced to reach the lowest since January 2009 , adding to bearish sentiment. A stronger dollar further pressured the metal.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February reached a session low at $1 250.20 per troy ounce at 09:14 GMT, decreasing by 0.52%. Day’s high was touched at $1 256.50 an ounce. The precious metal hit a three-week high of $1 267.30 per troy ounce on Tuesday and settled 1.81% higher, the largest daily gain since October 22nd. Prices touched $1 211.10 per troy ounce on December 4th, the lowest since July 5th and closed the week 1.8% lower. Last month, gold plunged 5.5 percent, the most since June and the biggest drop for a November since 1978.

The precious metal has fallen 25% so far this year and is heading for the first annual drop in 13 years as investors lost faith in the metal as a store of value amid a rally in U.S. equities to a record and muted inflation.

“The gold market will probably mark time until next week’s FOMC meeting, bullion market’s focus may shift to the upcoming release of retail sales data and initial jobless claims data. Political compromise on the budget issue removes some uncertainty and reduces risk premiums in the markets and is therefore a negative for gold.”, said Howard Wen, an analyst at HSBC Securities (USA) Inc., cited by Bloomberg.

Fed stimulus outlook

On Wednesday, US policymakers unveiled an agreement to ease automatic spending cuts by about 60 billion USD over two years and cut the nation’s deficit by $23 billion. US Senator Patty Murray, a Democrat, and Republican Representative Paul Ryan said that the budget proposal could prevent a government shutdown when funding authority expires January 15th and could favor the economy. The agreement sets a budget ceiling for the fiscal 2014 at $1.012 trillion and $1.014 trillion for the fiscal 2015.

The budget accord fueled speculations that the Fed might trim its bond buying program next week.

The FOMC’s October meeting minutes pointed that Federal Reserve officials may reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves. Central bankers are set to reconvene on December 17-18th.

The Federal Reserve may begin to scale back its $85 billion in monthly asset purchases at the committee’s policy meeting on December 17th-18th rather than wait until January or March, according to 34% of economists who participated in a Bloomberg survey on December 6th. In November’s survey, 17% of respondents projected a tapering in December.

Fed Reserve Bank of Atlanta President Dennis Lockhart said that any decision to taper should be accompanied by a limit on the size of the program or a timetable for ending it.

A stronger dollar put more pressure on gold. The U.S. dollar index, which measures the greenback’s performance against a basket of six major peers, increased 0.08% to 79.94 by 09:16 GMT. The December contract held in a day’s range between 79.97 and 79.85. The U.S dollar index settled last week 0.52% lower. Strengthening of the dollar makes commodities priced in it more expensive for foreign currency holders and limits their appeal as an alternative investment.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were further reduced to 833.60 tons on Wednesday, the lowest since January 2009. Outflows have totaled nearly 472 tons this year. Billionaire hedge-fund manager John Paulson who holds the biggest stake in the SPDR Gold Trust told clients on November 20 that he wouldn’t invest more money in his gold fund because it isn’t clear when inflation will accelerate. US inflation is still well below the Fed target of 2.00%.