Gold prices fell to more than a five-week trough on the firm U.S. dollar. The greenback jumped close to a one-month peak, which dented the bullion’s appeal to investors using rival currencies. Meanwhile, the markets are waiting for the Federal Reserve’s September 21-22 meeting to get clues on the tapering timeline. The central bank is expected to start discussing the reduction in its monthly bond purchases.
The yellow metal is considered as a hedge against currency debasement and inflation. But the tapering would eliminate both those conditions and therefore dampen gold demand.
Spot gold is currently trading at $1,754.12 per ounce as of 0830 GMT.
Stephen Innes, a managing partner at SPI Asset Management, suggested that the market is already considering the tapering announcement. He noted that the critical support levels are fading that opens up for a test at $1,700 per ounce.
OANDA senior market analyst Jeffrey Halley noted the impact of the persistent strengthening of the dollar and U.S. Treasury yields. He predicted that the bullion might test the immediate support level at $1,720 and the longer-term support at around $1,657.
DailyFX strategist David Song added that the gold price outlook depends on the Fed’s interest rate decision. The recent slowdown in U.S. CPI indicates a possible rate hike in the near future. He also said the gold could face a more bearish fate if the Fed normalizes its monetary policy sooner than expected.
In physical trading, gold demand in India remained weak despite the price decline. Local gold futures dropped to 45,812 rupees per grams last week, the lowest level since August 10. Dealers hope that the recent price correction and the coming festival season will increase jewelers’ gold purchases. One analyst said the current price is very attractive for jewelers to build their stocks.
In China, there was a strong demand for physical gold. It was due to the strength of the yuan and the collapse of property stocks that boosted the appeal of the safe-haven bullion. Premiums rose to as much as $7-9 over global benchmark prices. There was also large gold importation last week.
In a related development, the U.S. Commodity Futures Trading Commission reported that market speculators raised their bullish stance in COMEX gold contracts by 3,856 in the week that ended on September 14.