Fed tapering whacks gold, spooks China

Wholesale London gold sank against all currencies Thursday morning, falling 1.9% vs. the dollar to hit six-month lows after initially trading flat overnight despite the U.S. Fed finally reducing its $85 billion per month in asset purchases.

Cutting next month's quantitative easing of U.S. mortgage and longer-term government bond rates to $75 billion, the Fed pointed to "growing underlying strength in the broader economy."

U.S. stock indexes surged to new all-time closing highs, while Treasury bonds fell and spot gold fell through this week's previous low at $1,230.

Besides the taper, however, the Fed revised its policy on short-term interest rates, saying it will hold the Federal Funds rate at zero "well past the time" that the U.S. jobless rate falls to 6.5%, its previous line in the sand.

Overnight in Asia, Japanese shares rose but Chinese stocks fell as the People's Bank of China (PBoC) broke its own rules and took to Weibo, the equivalent of Twitter, to announce a "short-term liquidity operation" after Shanghai's interbank lending rate jump above 10%.

The PBoC usually waits a month before reporting such moves, says the Financial Times.

"It's very clear they want to calm down market fears," the FT quotes ANZ analyst Zhou Hao, noting the previous spike in Chinese interest rates in June, when U.S. Fed Chairman Ben Bernanke spoke about possible QE tapering.

Shanghai gold today fell 0.8% in yuan but increased its premium over international prices from $6 to $11 per ounce.

Amongst Western investors, "More sensible minds realize," says a note from David Govett at brokers Marex, "that on the whole [the Fed news] is not a good move for the precious complex.

"With further tapering probably to come over the course of next year, the outlook remains muted. However, I don't subscribe to the theory that it's all over for the bullion market [and] would be a buyer of dips if we do manage to break below $1,200."

Bids in London's wholesale market briefly dropped below that level Thursday morning, hitting a six-month low of $1,199.75 per ounce.

Priced in Sterling and Euros, wholesale gold bullion fell to its lowest since spring 2010, down 29% and 31% respectively from the start of 2013.

Silver tracked gold in dollars, briefly falling below $19.30 per ounce – a "key level" according to technical analysts at one bullion bank.

Fed tapering "highlights the overall positive sentiment toward the macro economy," reckons UBS analyst Joni Teves.

"Equities are in fierce competition with gold for investor dollars, and this year's trend of rotation away from gold into growth assets is expected to continue into 2014."

"This is another sign of increasing normalization for the world economy," agrees Matthew Turner at Macquarie Bank. "Gold's insurance function is less desirable in that environment."

"But if the economy is accelerating as people think," counters Albert Edwards in his latest Global Strategy Weekly for clients of French investment and London bullion bank Societe Generale, "how come Thomson Reuters has just reported the fastest pace of U.S. earnings downgrades on record?

"If we are set for a profits-driven economic slowdown, then the low rate of core inflation will start to become a key concern. Deflationary forces are in fact stronger than even the latest [official data] suggests."

About the Author

Adrian Ash runs the research desk at BullionVault.