Gold Falls for Second Day as Fed Outlook Trims Investment Demand

Feb 20, 2014 2:43 pm ET

Feb. 20 (Bloomberg) -- Gold futures fell for the second straight day as concern that the Federal Reserve will press on with cuts in U.S. monetary stimulus damped demand for the metal as an alternative asset.

Several Fed policy makers said that in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace” of bond purchases, minutes from the January meeting released yesterday showed. Gold rose 70 percent from December 2008 to June 2011 as the central bank pumped more than $2 trillion into the financial system.

The Fed cut monthly bond buying by $10 billion at each of its past two meetings, leaving purchases at $65 billion. Gold plunged 28 percent in 2013, the most since 1981, partly as the prospect of less stimulus reduced demand for the metal as an inflation hedge. The cost of living rose at a slower pace in January, the government said today.

“The Fed has made it clear that there is not going to be a pause in tapering,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, said in a telephone interview. “The ‘hope’ trade for gold may be fast diminishing.”

Gold futures for April delivery fell 0.3 percent to settle at $1,316.90 an ounce at 1:53 p.m. on the Comex in New York. On Feb. 18, the price reached $1,332.40, the highest for a most- active contract since Oct. 31.

“There has clearly been profit-taking following the sharp increase in price,” Commerzbank AG said in a report. “Our economists still anticipate that the U.S. Federal Reserve will scale back its bond purchases by $10 billion at each of its meetings.”

Analysts Split

Gold has climbed 9.5 percent this year as signs that the U.S. economy wasn’t recovering in line with expectations boosted demand for a haven. The metal fell into a bear market in April and has dropped more than 30 percent from a record $1,923.70 reached in September 2011.

Some analysts are split on the outlook for prices. Gold has lost its luster and will decline to $1,011 in December as the Fed tapers and the dollar strengthens, Westpac Banking Corp. said today in a report. Goldman Sachs Group Inc. last week affirmed a forecast for $1,050 by the end of the year. UBS AG said yesterday that the metal has “started to shed its stigma,” and increased its 2014 forecast to $1,300 from $1,200.

Holdings in exchange-traded products backed by gold declined 5.5 metric tons to 1,735.4 tons yesterday, data compiled by Bloomberg show. Assets fell 33 percent last year.

Silver futures for March delivery fell 0.8 percent to $21.684 an ounce. Yesterday, the price dropped 0.2 percent, ending an 11-session rally that was the longest since March 2008.

Palladium futures for March delivery gained 0.1 percent to $736.30 an ounce on the New York Mercantile Exchange.

Platinum futures for April delivery declined 0.8 percent to $1,412.50 an ounce.

--With assistance from Phoebe Sedgman in Melbourne. Editors: Patrick McKiernan, Millie Munshi