Taper Talk is Crushing Gold

It seems as if this headline has been on repeat since late October, when the contract for December delivery was hovering right around $1,350 an ounce. Now, here we are approximately 12 days later and the contract just settled at a one month low of $1,271.20, down .8% on the day and 24% year to date.

The price action in gold over the course of the past few months has been perplexing to say the least. With the continuation of the Federal Reserve's quantitative easing program in September, the surprise cut in interest rates by the ECB last week and generally speaking a weaker dollar the world was set up perfectly for higher gold prices. However the metal has had an extremely difficult time catching a bid above that $1,350 level, only briefly pushing through $1,400 in late August before snapping back to $1310 within weeks, crushing investors trying to pick a bottom.

The catalyst for the intense selling pressure remains uncertainty around the future actions of the FOMC, and recent encouraging economic data that has fueled speculation on the street that the Fed may bump up their tapering to December, rather than the previously anticipated March. With that dark cloud lingering over the metal, combined with reports that inflation has only increased at a rate of 1.2% this year, there are substantial headwinds facing precious metals in the near term. In order for us to see a pop in the metal we need one of two things to happen. 1) The FOMC indicates that they are going to proceed with the QE3 program at its current $85b per month rate in light of recent economic reports or 2) signs emerge of a substantial rise in inflation. With #2 unlikely, it appears that option #1 is the only hope for a near term trade to the upside.

With that said, I think all eyes will be on Thursday's congressional testimony by Janet Yellen, as gold traders try to extract as much clarity as they can around future FOMC policy. Any dovish commentary coming from the recently nominated Chair of the Federal Reserve could have gold reversing course. At least in the short term...

Travis McGhee


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At the time of publication, Travis McGhee held no positions in the stocks