Gold futures extend drop from six-month high ahead of Fed meeting

Gold futures extended a decline from the strongest level in more than six months as better-than-expected US economic data backed the case for further stimulus cuts before the Federal Reserve starts a two-day meeting today. Also fanning negative sentiment, assets in the SPDR Gold Trust, the biggest bullion-backed ETF, retreated from the highest level since December 20th yesterday.

On the Comex division of the New York Mercantile Exchange, gold futures for settlement in April traded at $1 359.80 per troy ounce at 07:53 GMT, down 0.95% on the day. Prices shifted in a daily range between $1 367.90 an ounce and $1 358.10 an ounce. Yesterday, prices touched $1 392.60 an ounce, the highest level since September 9, before losing as much as 1.2%, the steepest daily drop since January 30.

Bullion settled last week 3.2% higher, marking a sixth consecutive weekly advance, the longest winning run since August 2011.

Gold futures are up 13% this year amid concern the economic growth of the largest bullion consumer, China, may slow, while unrest in Ukraine hurt emerging market assets already weakened by reductions in Fed stimulus, boosting demand for the precious metal as a store of value.

Yesterday, gold prices touched more than-six month high as a likely deep freeze in relations between Russia and the West spurred demand for it as a store of value.

The US and European Union warned Moscow not to annex Crimea after Sunday’s referendum, according to which 95.5% percent of voters backed the pro-Russian local government’s decision to separate from Ukraine and join Russia. While the United States, European Union and the Ukrainian government deemed the referendum illegal, Russia said it was in consonance with international law.

President Barack Obama authorized Treasury Secretary Jacob J. Lew to impose financial sanctions which may include freezing assets or prohibiting American companies or individuals from doing business with people or entities who threaten Ukraine’s security.

“The attention has now been brought back to the U.S., with investors focused on what the data is showing and what the Fed is going to do,” said Lv Jie, a Hangzhou-based analyst at Cinda Futures Co., a unit of one of four funds in China created to buy bad debt from banks, cited by Bloomberg. “There’s a sense that things could have been a lot worse in Crimea but that hasn’t happened, so gold lost some of that safe haven support.”

Fed stimulus outlook

The Federal Reserve, which reduced monthly bond buying by $10 billion at the prior two meetings, will cut purchases by another $10 billion to $55 billion, and continue reductions at the same pace at every meeting before exiting the program at its Oct. 28-29 gathering, according to a Bloomberg survey.

However, Federal Reserve Chair Janet Yellen said last month that central bank officials were “open to reconsidering” the pace of reductions in monthly bond purchases, should the economy falter, in contrast with her comments made earlier in February that US economy has gained enough strength in order to withstand the reduction of monetary stimulus.

Yesterday, better-than-expected US data backed further the case for stimulus cuts as industrial output in the United States rose 0.6% in February, marking the fastest monthly pace since August 2013. The result exceeded preliminary estimates, pointing to a 0.2% gain. In January the performance of the index of industrial production has been revised up to a 0.2% drop from a 0.3% drop previously.

In addition, the capacity utilization rate was 78.8% last month, which surpassed expectations of a rate of 78.6%.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETP, fell to 812.78 tons on Monday, from the highest level since December 20th. Holdings in the fund are up 0.9% this year after it lost 41% of its assets in 2013 that wiped almost $42 billion in value. A total of 553 tons has been withdrawn last year.