Gold Drops on Risk Fed Will Curb Stimulus as Investors Sell ETFsDebarati Roy and Maria Kolesnikova
Gold fell the most in two weeks as the Federal Reserve signaled it is ready to curb a bond-buying program as needed and inflation remained in check, eroding demand for the precious metal as a hedge.
The Federal Open Market Committee said in a statement it is “prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” Exchange-traded funds backed by gold plunged 174 metric tons last month, the biggest drop on record, according to data compiled by Bloomberg. Equity and commodity markets fell after a report showed China’s manufacturing expanded at a weaker pace in April.
“The Fed saying that it may curb purchases if deemed fit is not good for gold,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, said in a telephone interview. “Also, the Chinese data is bearish for all metals, including gold.”
Gold futures for June delivery retreated 1.8 percent to settle at $1,446.20 an ounce at 1:41 p.m. on the Comex in New York, the biggest drop since April 15, when prices slumped the most in 33 years. The metal slid into a bear market last month and is down 23 percent from its closing high in September 2011.
The Fed said it will maintain its bond buying at a pace of $85 billion a month in a bid to boost employment. A report in two days is projected to show unemployment stayed at 7.6 percent in April, and data on manufacturing today added to evidence the economy is slowing as federal spending cuts and tax increases bite.
After the 2 p.m. statement from the Fed, prices pared losses, trading at $1,455.80 as of 4:08 p.m., compared with yesterday’s close of $1,472.10.
“Gold erased part of its losses since the market expects the Fed to continue to pump money as inflation is not a concern,” which may spur price gains later, Phil Streible, a senior commodity broker at R.J. O’Brien & Associates, said in a telephone interview. “The other negative factors, like weak Chinese data and the drop in ETPs have continued to act against gold.”
The Fed said that bond buying will continue “until the outlook for the labor market has improved substantially.” It also left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
While prices have rebounded 9.4 percent since touching a two-year low on April 16, they dropped 7.7 percent last month, the biggest loss since December 2011, as some investors lost faith in the metal as a traditional store of value.
ETP assets were 2,275.84 tons yesterday, the lowest since October 2011, according to data compiled by Bloomberg. SPDR Gold Trust holdings, the biggest ETP, dropped to 1,078.54 tons, the lowest since September 2009.
“When you get an ETF market that doesn’t yield as high as comparable assets, then you will have continual topside pressure,” said Jonathan Barratt, the chief executive officer of Barratt’s Bulletin, a commodity newsletter in Sydney. “People are moving funds from non-yielding to yielding assets.”
Silver futures for July delivery dropped 3.5 percent to settle at $23.343 an ounce on the Comex. Prices slumped 15 percent last month, the most since December 2011.
On the New York Mercantile Exchange, platinum futures for July delivery fell 2.5 percent to $1,469.50 an ounce. The metal declined 4.3 percent last month, the third straight slump.
Palladium futures for June delivery dropped 1.9 percent to $684.75 an ounce. In April, the price tumbled 9.2 percent, the most since May.