Gold futures decline as Fed may taper this week, ETP holdings at the lowest since created

Gold fell on Monday, as strong US retail data raised concerns that the Fed might decide to trim its asset purchasing program at FOMCs policy meeting due Tuesday-Wednesday this week. Also fanning negative sentiment, a Bloomberg survey showed that holdings in exchange-traded products (ETP) will contract further in 2014. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, remained unchanged at the lowest since January 2009, adding to bearish sentiment. A weaker US dollar relieved some pressure on the yellow metal.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February declined by 0.52% to trade at $1 228.20 per troy ounce by 09:23 GMT. Prices swung between day’s high and low of $1 236.80 and $1 227.30 an ounce respectively. The precious metal settled last week 0.8% higher. 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 in November since 1978.

The precious metal has fallen 26% so far this year and is heading for the first annual drop in 13 years as investors lost faith in it as a store of value amid a rally in U.S. equities to a record and muted inflation.

“The focus for the week is on the FOMC, speculative short positions remain substantial and redemptions from SPDR Gold Shares accelerated in December.” wrote analysts led by Mark Pervan, working for Australia & New Zealand Banking Group Ltd., cited by Bloomberg.

Fed stimulus outlook

A recent series of upbeat economic data from the US reinforced speculations the Federal Reserve might begin scaling back its monthly bond purchases at FOMC’s meeting this 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.

The upbeat sales added to the steadily building-up positive sentiment for the US economic recovery, buoyed by a larger-than-expected third quarter growth and unemployment hitting 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 due this 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 Tuesday-Wednesday this week.

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.

Worse-than-expected annualized producer prices released on Friday shed some of the recently built concern for an earlier Fed tapering as inflation remained well below the official target and gave the central bank room to ease money supply. The numbers however couldn’t shift the improved sentiment pointing at a highly probable bond purchases reduction next week.

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 weaker dollar supported the metal. The U.S. dollar index, which measures the greenback’s performance against a basket of six major peers, decreased 0.24% to trade at 80.19 by 09:24 GMT. The December contract held in a day’s range between 80.36 and 80.17. The U.S dollar index settled last week 0.06% lower, after declining 0.53% in the preceding two 5-day periods. Weakening of the dollar makes commodities priced in it cheaper for foreign currency holders and boosts their appeal as an alternative investment.

The steepest decline in gold prices since 1981 resulted in investors decisions to dump gold-backed exchange-traded products at the fastest pace since the securities were created in 2003. According to data compiled by Bloomberg, holdings in the largest 14 ETPs plunged 31% to 1 813.7 metric tons since the start of the year, marking the first annual drop since the funds started trading a decade ago. The removals reduced $69.5 billion in the value of the assets as gold prices declined the most in 32 years. According to the median forecast in a Bloomberg survey of 11 analysts, further 311 tons will be withdrawn in 2014.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, remained for a second day at 827.60 tons on Friday, the lowest since January 2009. 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%.

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