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Gold Prices Keep Falling While Market Expects a Smaller Fed’s Taper

The U.S. Comex gold futures rose 0.72 percent on Monday but fell 0.64 percent on Tuesday. The gold futures dropped below $1,300 during Asian morning on Wednesday, reflecting the traders’ jittery towards the Fed’s announcements on Wednesday. The Dollar Index fell 0.38 percent in the past two days to 81.143 on Tuesday. The S&P 500 Index rose about one percent this week after rising 1.98 percent last week while the Euro Stoxx 50 Index increased 0.83 percent after surging 2.27 percent last week. The U.S. 10-year Treasury yield fell from a recent high of three percent to around 2.85 percent on Tuesday.

A Smaller Fed Taper?
Summers’ withdrawal from the Fed Governor’s race has raised the odds of Yellen being the next chairwoman. As the bond yields have risen to reflect a tighter monetary policy under Summers, bond yields rallied and the gold prices rose on Monday. On Tuesday, gold prices dropped as the U.S. August CPI rose 0.1 percent compared to a median forecast of 0.2 percent and the investors lowered their demand for gold as an inflation hedge. With a moderate inflation and a lower than expected industrial production of 0.4 percent in August, a Bloomberg survey forecasts that the Fed will taper by only $5 billion per month from a higher amount before. The gold futures may have already priced in a $10 billion tapering although gold prices are still very volatile as the path of tapering is uncertain. Investors will also focus on the Fed’s economic projections for 2016.

Lower Gold Demand from Indian Consumers and Speculators
On Tuesday, India raised the import duty on gold jewellery to 15 percent, which is higher than the ten percent imposed on raw gold imports. Festival demand this year is expected to drop as prices have become very volatile due to the Rupee sell-off and the Q2 GDP slowing to 4.4 percent year-over-year from six percent at the end of 2011. Consumers tend to wait-and-see when prices are volatile. India accounts for about 20 percent of global gold demand. Based on the CFTC data, the net-long combined positions by speculators dropped 16 percent during the week ending 10 September from a recent high of 101,396 contracts the week before. Sell-side analysts including Goldman, Societe Generale, and ABN Amro expect gold prices to further decline from here. At the same time, production cut by the gold producers, if prices fall below $1,200, and the resurgence of geopolitical risks could stabilize or boost prices.

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18 Sep 2013 | Categories: Gold

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