Gold rose on Friday amid signs of low US inflation, which reduced speculations that the Fed will taper its stimulus program next week. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were reduced by the largest daily amount in nearly two months on Thursday and fell to the lowest since January 2009, adding to bearish sentiment. A stronger US dollar further pressured the yellow metal.
On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February rose by 1.08% on Friday and settled at $1 238.10 per troy ounce after swinging between day’s high and low of $1 238.20 and $1 220.10 an ounce respectively. Gold added 0.8% for this week, after declining 1.8% in the previous 5-day period. Prices touched $1 211.10 per troy ounce on December 4th, the lowest since July 5th. Last month, gold plunged 5.5 percent, the most since June and the biggest drop in November since 1978.
The precious metal has fallen 26% so far this year and is heading for the first annual drop since 2000 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.
Fed stimulus outlook
On Friday, a report by the Labor Department confused market players and reduced bets that the Fed might begin trimming monthly bond purchases at FOMCs meeting next week.
The report by the Labor Department revealed that wholesale prices declined for a third consecutive month in November, driven by lower costs for energy and cars.
“If you believe the government that inflation is non-existent, that should be enough to take the Fed tapering talk off the table for good next week,” said Peter Hug, the global trading director of Kitco Metals Inc. in Montreal, cited by Bloomberg.
However, a recent series of upbeat economic data earlier in the week added to the steadily building-up positive sentiment for the US economic recovery, which may prompt the Fed to reduce stimulus next week.
On Thursday, the Commerce Department reported that retail sales rose solidly in November as Americans purchased automobiles and a range of other goods. Retail sales rose by 0.7% last month, beating analysts’ projections for a 0.6% gain, while October’s reading received an upward revision to 0.6% from initially estimated at 0.4%. The upbeat general indicator was lifted by a 1.8% jump in sales at auto and parts dealers, which offset a 1.1% decline in fuel prices.
Retail sales less autos, which exclude the volatile automobile sales, rose by 0.4% from an upward revised 0.5% a month earlier, exceeding expectations for a 0.2% advance.
Core retail sales, which exclude automobiles, food services, gasoline and building materials and correspond more closely to the consumer spending component of GDP jumped by 0.5% after advancing 0.7% in October.
Data last week showed a larger-than-expected third quarter growth, while unemployment hit the lowest level in 5 years. The numbers, coupled with a possible two-year budget accord that would lift the fiscal uncertainty, led more analysts to believe the Federal Reserve might actually trim its $85 million monthly bond purchases at FOMC’s meeting next week.
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 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 0.05% to 80.21 on Friday. The December contract held in a day’s range between 80.42 and 80.15. 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.
On Friday, assets in the SPDR Gold Trust, the biggest bullion-backed ETF, remained at 827.60 tons, the lowest since January 2009, after being reduced by 6 tons on Thursday, the largest daily outflow in nearly two months. The fund has not seen inflows in more than a month, hinting that a substantial increase in prices is unlikely. Outflows have totaled nearly 478 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%.
“It’s very difficult to build any meaningful strength in the gold markets given continuing outflows from the ETFs,” said Mark Keenan, head of commodities research for Asia at Societe Generale, cited by Thomson Reuters.