Gold Prices Drop As Fed Signals Stimulus Slowdown

Gold futures dropped Thursday, stung after the Federal Reserve signaled that it may reduce the amount of monetary stimulus it provides as early as this year.

Meanwhile, copper futures lost further ground after a weak reading for manufacturing activity in China this month.

August gold futures  fell 2.3% to $1,342.90 an ounce in electronic trade. Futures prices turned lower earlier Wednesday after Federal Reserve Chairman Ben Bernanke told reporters that the central bank’s purchases of government bonds may be scaled back as early as this year if economic activity improves in line with its forecasts.

The central bank is currently buying $85 billion a month of bonds in an effort to encourage economic growth. The central bank’s bond-buying program has helped bolster U.S. equity prices, and aggressive monetary easing in recent years has been credited for helping gold prices rally.

The “fundamentals look a little better to us, in particular the housing sector, which has been a drag on growth since the [financial] crisis, is now obviously a support to growth,” Bernanke said during a press conference after the conclusion of the Fed’s two-day policy meeting.

But if the economy “were really as strong as the messaging they’re sending, why not say, ‘We’re going to trim [monthly bond buying] back to $45 billion or trim this back to $60 billion?,” asked Scott Carter, chief executive of Lear Capital, a precious-metals retailer based in Los Angeles.

“We’re not getting any of that” from the Fed or from Bernanke, who, Carter said in a telephone interview, continued to deliver a “double message” to the markets on Wednesday.

U.S. equities tumbled after the Fed update, with the Dow Jones Industrial Average  losing 206 points to end at 15,112.19.

The U.S. dollar  , however, climbed in the wake of Bernanke’s comments, a negative development for gold as a stronger dollar can make gold and other dollar-denominated commodities more expensive to those using other currencies.

Before the Fed’s announcement, gold prices on the New York Mercantile Exchange settled higher by $7.10, or 0.5%, at $1,374 an ounce.

In the short term, Carter expects to see continued softening of gold prices, with technical resistance around $1,300 to $1,325 an ounce.

“We’ve got to sort through what the real economy is doing versus what the Fed is doing, and that will play itself out between now and the end of the year,” he said.

But looking out 12 to 36 months, “the storyline is strong for gold and silver,” as debt continues to escalate worldwide, and as Europe and Japan grapple with their own economic issues, said Carter.

Even if the Fed were to cut bond purchases by half, “that’s still a lot of liquidity that’s being pumped into the market,” he said.

Copper moves lower

Elsewhere Thursday, copper prices for July delivery  fell 3 cents, or 1%, to $3.11 a pound in electronic trade, with the industrial metal extending losses after HSBC’s China manufacturing survey showed activity was slowing in June.

The manufacturing Purchasing Managers’ Index fell to a nine-month low of 48.3, down from May’s final reading of 49.2. A reading below 50 indicates contraction.

July silver  was down 45 cents, or 2.1%, to $21.17 an ounce, and July platinum  slumped $17.80, or 1.3%, to $1,406.10 an ounce.

September palladium   lost $7.90, or 1.1%, to $688.50 an ounce. The contract on Wednesday closed Nymex floor trading below $700 an ounce for the first time since May 8, according to FactSet data.

Source : Marketwatch