The gold market may hold its collective breath this week as investors mine for hints – for anything at all related to tapering – from the Federal Reserve’s press conference on Wednesday, which comes after the two-day Federal Open Market Committee meeting.
The anticipated news conference is the last major market trigger for gold, in its worst year for several years, before an uncertain 2014. Gold investors may look to consolidate positions and calculate returns before the end of the calendar year.
Many analysts see significant risk that gold could drop further, exacerbating its 25 percent decline so far this year and perhaps even sinking beneath the yearly low of $1,180 per ounce reached in June. That depends on exactly what the Fed says, since tapering has already been priced into the gold market to some extent, ever since tapering talk pushed gold into a brief crisis earlier this year.
Investors betting against gold rose to historic highs earlier this month, while long positions on gold – a measure of those favoring the yellow metal – fell to its lowest level in five years, according to data from the Commodity Futures Trading Commission.
“We suspect that the central bank will likely not do anything at its meeting, but will likely use the occasion to telegraph its intentions of an imminent move," wrote precious metals analyst Edward Meir in a note Saturday. “This will likely set up a weaker tone in gold heading into year-end, with a good chance that we could take out our 2013 lows in the process.”
Most economists see a tapering call, whereby the Fed immediately starts winding down its $85 billion monthly bond purchases, as unlikely in December, despite strong recent economic data. Investors will still tune in, however, in case bond yields spike. Higher yields on 10-year Treasuries usually bode badly for gold, which tends to move in the opposite direction from yields.
Scott Carter, CEO of precious metals retailer Lear Capital, believes tapering has mostly been priced in by the gold market, but still predicts prices tumbling if there is significant tapering talk on Wednesday.
“A lot has already been priced in, but it’ll still take a hit on the news,” he said in an interview with International Business Times. “After that, though, I think the real tell will be what happens in the equity markets and the bond markets.”
Gold could hit a “double bottom” at $1,200 in the wake of the meeting, ETF Securities precious metals analyst Mike McGlone told IBTimes, without falling below that to worrying lows.
“The market is showing signs of constrained supply and demand at these levels,” said McGlone. He added that gold miners’ comprehensive costs of production are about $1,200 per ounce on some analyses, another reason for that level to be a key threshold.
“The gold market is likely to face sideways trading ahead of the meeting,” wrote HSBC Holdings plc (LON:HSBA) analyst James Steel in a note last Friday. But the long-term scenario for gold may be more positive, even if tapering starts in 2014 as widely expected, so long as interest rates are not hiked by central banks too quickly.
“Investor recognition of sustained low-interest rate environment in the U.S., Japan and the euro zone – even in the face of tapering – holds out the possibility that after another bout of weakness in the wake of a tapering announcement, gold price may stabilize or bounce,” Steel wrote last Thursday.
Still: “Gold’s muted response to a number of catalysts have exacerbated disillusionment among gold investors,” wrote Barclays PLC (LON:BARC) analysts on Monday. Outflows from gold exchange-traded products sped up in December, rather than stabilizing, they wrote.
McGlone put it more bluntly, saying: “The best thing for gold right now is: Gold needs this year to end.”
Gold opened at $1,244 per ounce in New York on Monday. Its most recent memorable rally came earlier this year, after fears over a U.S. military intervention in Syria. Gold could still enjoy a “relief rally” back to $1,300 before year's end, as investors cover short positions if no strong tapering signals are given, reported CNBC.