Gold continued its descent in Europe on Wednesday morning, extending Tuesday’s late sell-off to below $1,630 after the latest US FOMC minutes dampened hopes for more quantitative easing.Spot gold fell $16.80 to a fresh low since March 22 at $1,629.60 per ounce at one stage. It was last at $1,636.30/1,636.90, still down $10.80.
Gold fell alongside other assets - global equities, energy markets and the euro - after the FOMC minutes reiterated that more monetary injection would only be needed if the economy worsened. Only two out of the 10 voting members supported a third round of quantitative easing (QE3) to stimulate the US economy, which, they agreed, was moderately improving.
Gold futures might have gotten knocked down again by Federal Reserve commentary, but analysts and traders suspect that the market will find some kind of footing before long.
They cite potential for bargain hunting after the recent sell-off and still-accommodative monetary policy, with short-term U.S. interest rates remaining at basically zero.
Gold has fallen sharply on other occasions this year following Fed policy communications. March13, the day this latest FOMC decision was announced, saw the spot market gold price drop 2% from the day’s high, while on February 29, gold fell nearly $100 an ounce after Fed chairman Ben Bernanke told Congress he saw potential inflationary pressures from rising gasoline prices.
Early in the year, gold rallied on growing ideas that the Fed would undertake further quantitative easing, with the June contract hitting a three-month high of $1,795.10 on Feb. 28. Further easing presumably would undercut the dollar and add to inflation concerns, which tend to help gold. Low rates also mean little so-called “carry cost” or the loss of interest earnings by holding a non-yielding asset such as gold.
Gold then came under pressure again in mid-March when Fed policy-makers met and their post-meeting statement was seen as more upbeat on economic prospects than previously was the case, reducing the likelihood of still-looser monetary policy. Gold got another lift in late March when Bernanke wondered about the sustainability of job-market gains, providing some fodder for those still looking for QE. But then came the FOMC minutes Tuesday showing policy-makers less keen on more easing measures.
Most markets are suffering from a hangover from the Fed. All of the base and precious metals are lower, as are many other commodities such as crude oil, as well as the stock market. The U.S. dollar has benefited, however. There is a definite risk-off day, and it’s not just gold.
An improving economic outlook is supportive for the US dollar, which in turn is weighing on gold due to the inverse relationship between the two assets. Additional monetary accommodation would be unequivocally bullish for gold because cheap money tends to debase the dollar and create future inflationary risk.
Moreover Indian physical demand has been light here. Most Indian jewelry shops were in the third week of a “strike” to protest higher import duties, and this loss of demand has been cited as a factor weighing down gold lately.
The Indian strike situation will prove detrimental to the local physical market the longer it drags on, as a combination of reduced sales and falling gold prices will make it all the more harder for demand to pick up from where it left it
