Gold jumps off six-week high on Fed taper outlook

Gold plunged from a six-week high, trimming the longest weekly rally in 16 months, as investors assessed the prospects for Fed stimulus cuts at the upcoming FOMC’s meeting. Assets in the SPDR Gold Trust, the biggest bullion-backed ETF were reduced on Thursday, adding to bearish sentiment, while a stronger US dollar further weighed.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in February lost 0.32% to trade at $1 258.20 per troy ounce by 08:06 GMT. Prices touched a session high at $1 262.70, while day’s low was touched at $1 256.90 an ounce. Yesterday prices touched $1 265.30 per troy ounce, the strongest level since December 10th.

Gold futures headed for a fifth straight week of advances, the longest rally since September 2012. The contract is 0.3% higher this week. However, the precious metal settled last year 28% lower, the steepest annual decline since 1981 as investors lost faith in the metal as a store of value.

“Markets are considering whether the U.S. Federal Reserve will continue to lower its stimulus measures; we expect gold prices to remain pressured as expectations mount the Fed will taper stimulus,” said Lachlan Shaw, an analyst at Commonwealth Bank of Australia, cited by Bloomberg.

Fed stimulus outlook

Gold drew support yesterday, after a number of downbeat US reports.

The Chicago Federal National Activity Index unexpectedly declined to 0.16 in January, defying analysts estimates of an increase to 0.90. In December the index stood at 0.69.

A separate report by the US Department of Labor revealed the number of continuing jobless claims unexpectedly increased to 3.056 million from 3.022 million in the previous week. Analysts had expected the number of Americans who continue to receive unemployment benefits will decrease to 2.930 million.

Also fanning positive sentiment, the National Association of Realtors reported that the number of existing home sales increased to annualized 4.87 million in December after a downward revision of Novembers sales to 4.82 million. However, analysts had projected that the sales of existing homes in the US will reach 4.94 million.

However, a batch of recent overall upbeat data provided signs that US economic growth is accelerating and recovery seemed sustainable. US home construction slowed less than analysts had projected, while industrial output expanded for a fifth consecutive month. Only the consumer sentiment came at a lower-than-expected reading in January, but this combined with yesterdays downbeat reports was not enough to change the overall market consensus that Fed will continue tapering throughout 2014.

Central bank’s policy makers said on December 18th that they will reduce monthly asset purchases to $75 billion from $85 billion, underscoring improving labor market conditions.

The central bank will probably continue to pare stimulus by $10 billion at each policy meeting before exiting the program in December, according to a Bloomberg News survey of 41 economists, conducted on January 10th. The Federal Open Market Committee is scheduled to meet next on January 28-29.

A stronger US dollar also weighed. The US dollar index, which measures the greenback’s performance against a basket of six major peers, rose by 0.09% on Friday to trade at 80.59 by 08:29 GMT. Prices shifted in a daily range between day’s high and low, 80.63 and 80.51. The contract settled last week 0.76% higher. Strengthening of the dollar makes commodities priced in it more expensive for foreign currency holders and limits their appeal as an alternative investment.

Adding to bearish sentiment, assets in the SPDR Gold Trust, the biggest bullion-backed ETP, were reduced by 0.7% to 790.46 tons, capping the biggest one-day drop since December 23rd. The fund has lost 41% of its holdings in 2013. A total of 553 tons has been withdrawn in 2013. 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.