Analysts split over Fed's 2014 impact on gold as QE in spotlight

The price of gold bounced from a steady drop Monday lunchtime in London, trading back at $1,234 per ounce as Asian stock markets ended sharply down but Europe ticked up ahead of this week's U.S. Federal Reserve policy decision, due Wednesday.

China's gold premiums above international prices edged lower again, dropping to $6 per ounce at the close of solid trading on the Shanghai Gold Exchange.

Silver tracked and extended the moves in gold, cutting an earlier 1.2% drop in half to record a London Fix of $19.50 per ounce – exactly the level of Monday last week.

Looking ahead to Wednesday's Fed announcement, "A deferral of [QE] tapering and year-end squaring should be positive for gold," says a Japanese conglomerate's precious metals team.

Last week's high of $1,268 per ounce reached Tuesday came as speculative traders in U.S. gold futures and options raised their bullish bets and trimmed their bearish positions, new data from regulators showed Friday.

Over the week-ending Tuesday, Dec. 10, the so-called speculative "net long" of bullish minus bearish bets held in U.S. gold derivatives by non-industry traders rose by more than one-fifth to a three-week high.

Equal to 184 tonnes by value, however, the net long speculative position on gold remained near multi-year lows, down by two-thirds from the start of 2013.

"If the Fed announces that it will be scaling back its bond purchases," says Commerzbank in Germany, "[it] could pave the way for higher prices" as it removes uncertainty.

"Tapering," agrees a Singapore dealing desk in a note, "does not automatically mean a one-way bet on lower gold."

But while the U.S. Fed "will likely not do anything at its meeting," reckons INTL FCStone, a U.S. brokerage and dealer, any "telegraphing" of its early 2014 intentions "will 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."

Last week JPMorgan analysts cut their 2014 average gold forecast by 10% to $1,263 per ounce.

2014 prices will average $1,294 per ounce says Bank of America Merrill Lynch, repeating its forecast from September according to the Dubai Chronicle.

"Bearish conditions persist," says Swiss investment and London bullion bank UBS.

"We see little to change our near-term outlook of being mildly bearish on gold," agrees ANZ Bank's precious metals note Monday.

"Gold has trended downward since late August," notes a technical analysis from Societe Generale. 

"Since late October, a steeper channel has traced but [now] a sideways market is possible."

Whatever the Fed decides Wednesday on its quantitative easing program, unemployment above 6.5% means the U.S. zero interest-rate policy will remain "appropriate," the central banks has repeated over the last 12 months, so long as inflation doesn't rise above 3% or 4% per year.

The latest U.S. budget deal does not extend unemployment benefits launched in 2008 for the longer-term jobless.

That means some 1.3 million people stand to lose benefits from Dec. 28, potentially knocking 0.2 or even 0.5 percentage points off the official U.S. jobless rate, according to Goldman Sachs and JPMorgan analysts, currently at a five-year low of 7.0%.

About the Author

Adrian Ash runs the research desk at BullionVault.