Those who trade gold caused the price of the precious metal to decline on Jan. 27, and many market experts attributed this depreciation to speculation that the Federal Reserve would announce additional tapering of stimulus at the conclusion of its upcoming policy meeting scheduled for later in the week.
In addition, the resilient nature of the stock market was cited as helping to push the precious metal lower, Reuters reported. Equities have faced substantial headwinds so far this year, and their lack of performance has motivated many market participants to flock to gold. This situation of investors seeking the precious metal amid the poor results of stocks did not happen on Jan. 27.
Gold drops as equities rise
Spot gold rose to as much as $1,278.01 per ounce, according to the news source. This represented the highest value for the contract in two months. However, spot gold reversed direction after the S&P 500 Index managed to enjoy some gains, which represented a contrast to the sharp losses that the benchmark group of stocks suffered during the prior week.
This recovery was credited with drawing investors away from the precious metal, the media outlet reported. As a result of the strong performance of the index, spot gold erased the gains it had made earlier in the session, and was 1.2 percent lower at $1,253.69 an ounce by 3:35 p.m. EST (20:35 GMT).
April futures for the precious metal also declined, falling to as little as $1,257.20 per ounce on the Comex division of the New York Mercantile Exchange, according to Investing.com. The contract managed to recover from some of these losses, but was still down 0.1 percent at $1,263.20 per ounce.
Tapering speculation impacts metal
These contracts moved lower as those who trade gold speculated that when the Federal Open Market Committee concludes its meeting later in the week, the current pace of bond purchases will be reduced further, the media outlet reported.
The Fed purchased $85 billion worth of these debt-based securities every month starting in 2012. Then, at the conclusion of the central bank’s policy meeting in December, it was announced that starting in January, the financial institution would purchase $75 billion of these bonds per month.
The precious metal has been doing well so far this year, having reached a six-month low on Dec. 31, but there are concerns that it has become overvalued as a result of the appreciation that it has enjoyed in 2014, according to Bloomberg. If the Fed continues to gradually taper its bond purchases, this development could result in those who trade gold causing the precious metal to suffer further losses.
It is likely that the central bank will lower the monthly amount of debt-based securities that it buys by $10 billion at every one of the upcoming meetings of the FOMC, according to the median forecast of economists who took part in a Bloomberg poll. Regardless of what happens at the policy meeting, one analyst told the news source that he expects significant volatility from the precious metal in the near future.
“Those who worry about emerging markets want gold, and those who are optimistic about developed markets don’t want gold,” Xue Na, who works for Nanhua Futures Co. as an analyst at Nanhua Futures Co., told the media outlet. “We continue to expect price swings going into the FOMC meeting this week.”
Economic data and tapering
Whether the FOMC meeting results in further tapering of bond purchases relies largely on the strength of economic data, as the speculation that the Fed will soon opt to reduce QE further is based substantially on the robust nature of the reports that have been released, according to Investing.com.
However, some of the data that has been issued lately has drawn the strength of economic conditions into question, the media outlet reported. For example, a report released by the Census Bureau revealed lackluster home-buying activity in December. The activity fell short of the expectations of market experts. The data provided by the organization indicated that during the month, single-family home sales were made at a seasonally-adjusted annual rate of 414,000.
While this was well above the rate of 396,000 that happened in December 2012, it was far below the market prediction of homes being sold at an annual rate of 475,000 in the final month of 2013, according to the news source.
Another factor that could help to undermine confidence in the current U.S. recovery is the January jobs report, which will be released on Feb. 7, Brien Lundin, editor of Gold Newsletter, told MarketWatch.
The strength of the labor market is one key economic indicator that was noted by Ben Bernanke, chairman of the Fed, as having a crucial impact on the timeline that the central bank uses to taper stimulus. If the coming jobs report is lackluster, it could make the FOMC reluctant to further lower its bond purchases. Such a situation could motivate those who trade gold to push the precious metal higher.
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