So far, physical demand has not responded as enthusiastically to the gold price drop as in April. According to Barclays, the rolling monthly volume traded in the Shanghai Gold Exchange is about 20% below the April's peak.
For the Fed's meeting, gold investors will watch out for the conditions under which the bond purchases will be reduced, the Fed's outlook for the interest rates as well as the Fed's projections of the inflation and the unemployment rate.
Gold prices jumped on Monday in reaction to the unexpected contraction in the U.S. May ISM manufacturing data to 49 from last month's 50.7, giving the market hopes that the Fed will continue its stimulus.
Bubble talks about bonds and stocks have surfaced as have the concerns that the Fed will taper off its QE program sooner than expected. Strength in physical gold demand has countered the gold-backed ETF outflows.
Gold investors are keenly watching the direction of the gold-backed ETP holdings, which fell 174 metric tons or 7.1% in April to 2,275.84 metric tons. The SPDR gold holdings fell to a 43-month low to 1,078.54 tons at the end of April.
You have to distinguish between "the gold price," which reflects the paper gold futures prices and has collapsed, and "the price of gold," which represents the physical price of gold and has remained well-supported.
Bears of gold are battling with the bulls, with the bears excited by the shorter-term factors such as the U.S. economic improvement, and the bulls encouraged by the longer-term hedging demand by the global central banks.