Gold slips as dollar hits new highs, market digests FOMC

Otmane El Rhazi from The Bullion Desk.

Gold slipped in early morning London trading on headwinds from the dollar that prevailed over building momentum in precious metals.

The spot gold price was last at $1,206.20/1,207.00 per ounce, down $5.50 and confined to a $10 intraday range. A test of $1,200 looks increasingly likely.

“Positive US economic data were to blame for the price fall, particularly in the afternoon [on Wednesday],” Commerzbank said in a note.

Poor inflation data out of the Eurozone – the inflation rate had decreased by 0.2 percent year-on-year in December – had briefly spurred safe-haven buying but the dollar breaking to fresh nine-year highs against the euro appears to be weighing now.

The dollar broke through 1.18 earlier this morning to reach 1.1762 – its lowest since December 2005 again – ahead of the blockbuster US jobs report on Friday, though it has since retreated slightly to 1.1769.

The market is also still digesting the Federal Open Market Committee minutes for its December meeting, which gave few clues as to when the US may choose to increase interest rates – gold is historically sensitive to changes in monetary policies and expectations thereof.

The current consensus is for the first rise in rates sometime in the middle of 2015.

“The gold market has already had two years to embrace the reality of forthcoming Fed normalisation and to alter positions accordingly,” UBS Edel Tully said. “Much of this adjustment occurred in 2013, with gold prices losing nearly 30 percent.”

“Subsequently, the generally rangebound price action last year suggested that 2014 was in a way spent fine-tuning positions and assessing what lies ahead for gold in a rising rate environment,” she added.

In December, the FOMC said in its policy statement that it can be “patient in beginning to normalize the stance of monetary policy”, adding that this new language is consistent with its previous position that the federal fund rate will remain unchanged for a “considerable time” following the end of QE3 in October.

“According to the minutes, most Federal Reserve officials agreed their new policy guidance meant that they are unlikely to raise interest rates for at least the next couple of meeting, which implied it was unlikely to occur before the April meeting,” HSBC’s James Steel said.

“The minutes may have alleviated some concerns by gold market participants for an earlier than anticipated monetary policy tightening by the Fed. Gold may continue to consolidate from recent gains,” Steel added.

In other data today, German factory orders at -2.4 percent fell short of forecast, as did the overall Eurozone PPI at -0.3 percent while retail sales improved to 0.6 percent. Weekly US unemployment claims will close out the day.

In other metals, silver at $16.34/16.39 was down 18 cents and platinum slipped $2 to $1,212/12,17 while palladium at $785/791 was unchanged.

(Additional reporting by Tom Jennemann, editing by Mark Shaw)

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