Gold plunges below the April trough after the June FOMC meeting

After the June 18-19 FOMC meeting, the U.S. Fed has injected more fear than calm into the gold market. The U.S. Comex gold futures inched up 0.52% on Wednesday after the Fed has released its FOMC statement. On Thursday, the gold futures plunged as much as 7.18% to $1,275.40 before finishing the day at $1,286.20, the lowest level since September 2010. During Asian Friday morning, the gold futures have rebounded slightly to around $1,290. Year-to-date, the gold futures have declined about 23%. The CRB Commodities Index also tumbled 2.91% on Thursday, the largest drop in two months. The Dollar Index rebounded 1.62% in the past two days and ended at 81.915 on Thursday. The S&P 500 index and the Euro Stoxx 50 index fell close to 4% in two days in response to the FOMC meeting.

What's New from the Fed?

Ben Bernanke said that if the economy moves in line with the Fed's forecast, then the Fed thinks it is appropriate to reduce the pace of the bond purchases later in 2013. The Fed will continue to taper and finish the asset purchases by mid-2014, if the economy is performing as expected. To actually taper the QE3, the Fed needs to be fairly confident that the Q4 GDP in the U.S. will reach 2.3% to 2.6%, and the unemployment rate to drop decidedly below 7.2% to 7.3%. The inflation rate is expected to stay well below the 2% target. The U.S. has been growing at slightly above 2% in the first half of 2013 while the unemployment rate is currently at 7.6%. The Fed has implicitly set a new target of 7% unemployment rate to reduce the asset purchases. The Fed also revised down slightly the GDP growth and the unemployment rate for 2013.

Gold Sentiment Hammered Further

The stronger dollar, the rising U.S. bond yield, the weaker-than-expected China May flash manufacturing PMI, the general commodities sell-off, a subdue inflation rate, and the continued outflow from gold-backed ETPs have pushed down gold's sentiment further. In Bloomberg's weekly survey, the number of gold bears reaches the highest since January 2010. In the next few days, the market will closely watch the actions of the physical buyers. According to Bloomberg, the gold-backed ETPs have dropped 525 metric tons year-to-date to 2,106 metric tons, compared to a rise of 275 metric tons last year. As gold prices in China have dropped continuously in the past week, volume traded in the Shanghai Gold Exchange has climbed to a one-month high on Wednesday. The gold futures' RSI has plunged below 25, an oversold territory.

What to Watch Next Week

Apart from watching the physical demand response, we will also watch Germany's June IFO business climate index on June 24, the June U.S. consumer confidence index and the May U.S. new home sales on June 25 as well as the June Germany unemployment change, the May CPI and the industrial production in Japan on June 27.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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