Gold dropped below $1,200 an ounce to a five-month low Thursday after the Federal Reserve trimmed economic stimulus, reducing demand for haven assets.
Stimulus had helped gold to jump 70% from December 2008 to June 2011 as the Fed expanded its balance sheet through debt purchases, fueling expectations of accelerated inflation and a weaker dollar.
Bullion for February delivery fell 2.4% to $1,205.20 an ounce by 7:59 a.m. Thursday on the Comex in New York after dropping as much as 3% to $1,198 an ounce, the lowest since June 28. Prices tumbled into a bear market in April and are heading for the first annual drop in 13 years, as investors lost faith in the metal. Prices plunged 37% since reaching a record $1,923.70 an ounce in September 2011.
“The cat is now out of the bag in terms of tapering,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen. “Gold is under renewed pressure. Hedge funds are adding to existing shorts on the break below $1,210, and we are seeing long capitulation from those who had hoped that tapering would not happen so soon.”
Gold exchange-traded products lost $72.43 billion in value since the start of the year and mining companies wrote down at least $26 billion after investor appetite waned. Billionaire John Paulson, the largest holder in the SPDR Gold Trust, the biggest ETP, said Nov. 20 he personally wouldn't invest more money into his gold fund because it's not clear when inflation will quicken. Billionaires George Soros and Daniel Loeb sold their entire investments in the SPDR Gold Trust in the second quarter, U.S. government filings showed.
Hedge funds and other speculators raised their net-long position in gold 25% to 33,449 futures and option contracts in the week ended Dec. 10, U.S. Commodity Futures Trading Commission data show. Short bets, which slid 6.7% to 74,312, are still within about 7% of the record reached in July.
“End of tapering is a sign that we are putting the financial crisis behind us,” said Bjarne Schieldrop, the chief commodity analyst at SEB AB. “Since recovery is going in the right way there seems to be less risk of sitting in equities.”
Global equities have advanced to the highest in almost six years, and U.S. inflation is running at 1.2%, almost half the rate of the past decade. Gold ETP holdings slumped 32 percent this year, headed for the first drop since they started trading in 2003.
The Fed will reduce its monthly asset purchases to $75 billion, from $85 billion, “reflecting cumulative progress and an improved outlook for the job market,” Chairman Ben S. Bernanke said Wednesday after officials concluded a two-day meeting. The Bloomberg U.S. Dollar Index strengthened as much as 0.3 percent today. Gold, down 28% this year, typically moves inversely to the U.S. dollar.
“Gold has suffered all year on tapering fears and it is perhaps no surprise that the Fed's announcement has caused further liquidation,” said Mark Newson-Smith, head of sales at Xconnect Trading Ltd.
Gold for immediate delivery fell 1.1% to $1,205.05 an ounce in London trading, after earlier declining as much as 1.5% to $1,199.63. In New York, futures trading volumes were 67% higher than the average for the past 100 days for this time of day, according to data compiled by Bloomberg.
Silver for March delivery lost 3.9% to $19.28 an ounce after dropping as much as 4.6%. Platinum for January delivery slid as much as 1.7% to $1,319.90 an ounce, the lowest since July 5, before trading at $1,324.60. Palladium for March delivery was little changed at $699.75 an ounce after touching $696.50, the lowest since Oct. 7.