Gold Drops in Early Asian Trade

December 13, 2012 at 09:34

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Gold dropped about 1 percent on Thursday after the Federal Reserve linked its monetary policy to unemployment, raising concerns that future economic stimulus could be limited.

Gold benefits from easy monetary policy as it drives investors who fear diminishing value in fiat currencies to seek safety in hard assets such as bullion. Gold has risen nearly 9 percent so far this year.

The Fed said it plans to buy $45 billion in longer-term Treasuries each month on top of the $40 billion monthly purchase of mortgage-backed securities, as expected, but set unemployment and inflation thresholds for exit strategy.

“This announcement is a bit confusing to gold investors as it linked policy to unemployment, etc.,” said a Tokyo-based trader. “Perhaps the market wanted unlimited QE.”

Last month the U.S. unemployment rate dropped to a near four-year low of 7.7 percent, although the better number was the result of a lower number of job-seekers.

Physical gold buying demand is expected to pick up after prices fell below $1,700 level, traders said.

“Physical demand seems to be supportive, but can’t offset all investor selling,” said the Tokyo-based trader.

But gold is likely to remain rangebound, as many investors are closing books for the year, while the difficult U.S. budget talks keep them away from big bets.

The negotiation could drag on past Christmas given sharp differences between congressional Republicans and the White House on how to avert steep tax hikes and budget cuts.

“The near term risk is a stronger dollar,” said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong. “The ‘fiscal cliff’ is going right to the end, and that could support the dollar and take some shine off gold.”

The dollar, seen as an ultimate safe haven, is likely to attract investors worried about the uncertainty in the U.S. fiscal situation. A stronger greenback pressures dollar-priced commodities by making them more expensive for buyers holding other currencies.