Gold Tests Support At $1,200 As Fed Tinkers With Tiny Taper

Today’s AM fix was USD 1,205.25, EUR 881.16 and GBP 736.35 per ounce.
Yesterday’s AM fix was USD 1,233.25, EUR 896.97 and GBP 754.05 per ounce.

Gold fell $12.20 or 0.99% yesterday, closing at $1,218.50/oz. Silver slid $0.11 or 055% closing at $19.79/oz. Platinum dropped $10.99, or 0.8%, to $1,334.74 /oz and palladium edged down $1.28 or 0.2%, to $695.97/oz.

Gold in U.S. Dollars, 4 Day – (Bloomberg)

Yesterday, the U.S. Federal Reserve tinkered with a small taper as was largely expected. The Fed said it will reduce its monthly debt purchases by $10 billion per month, citing a better outlook for the U.S. jobs market. The taper reduces the $85 billion per month in bond buying marginally to $75 billion per month or from $19.6 billion per week to $17.3 billion per week.

The move was not unexpected and therefore pretty much priced into markets. However, risk assets reacted surprisingly well to the taper decision and continued to outperform with Wall Street stocks at record highs and Asian and European shares rallying.

Some traders were surprised that risk assets such as equities rallied on the reduction in quantitative easing while gold came under pressure again which is counter intuitive. Gold’s sell was again due to paper gold selling by traders speculators as there was little increase in selling by owners of bullion.

Gold (Black) and the Federal Reserve Balance Sheet (Red) – October 2008 to December, 2013

Arguably, the Fed’s small taper and statement is bullish for gold as the Fed confirmed that ultra loose monetary policies and the unprecedented zero percent interest policies are set to continue. Also, the Federal Reserve’s balance sheet continues to deteriorate as we pointed out yesterday.

Short positions by speculators on U.S. gold futures and options remain close to 7 and a ½ year highs and the risk of a short squeeze remains.

Physical buying in Asia will support gold. China will see continued strong demand in its Lunar New Year in January and February. Gifts of gold jewellery and gold bars are typical in China during this time.

Gold has had strong support at the $1,200/oz level. Spot gold has only breached that level once this year, hitting $1,180.20/oz very briefly intra day on June 28 and $1,180/oz and $1,200/oz remain support.

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