Gold fell on Thursday after the minutes of the Federal Reserve's most recent meeting did not indicate US policymakers were gearing up to take additional action to stimulate growth, thereby lessening the chances of a boost for the bullion price.
Wednesday's minutes showed the Fed is open to buying more Treasury bonds to stimulate the economy, but the recovery might need to weaken for a consensus to build.
The prospect of no immediate Fed policy response delivered gold a twin blow, firstly from the ensuing strength of the dollar, which boasts more yield-appeal for investors when rates are not expected to fall further and secondly from the lower chance of the extra liquidity that tends to favour gold.
The gold price has more than doubled in value since the Fed initiated its multi-trillion dollar bond-buying programme, a tool known as quantitative easing, in late 2008, during the depths of the global financial crisis.
Spot gold was down 0.6 percent on the day at $1,565.96 an ounce at 12:00 SA time. The price has fallen by 0.8 percent so far this week, marking its second consecutive weekly decline.
“The market can pretend that QE3 isn't important but it is one of the fundamental factors that is supporting gold prices,” Natixis head commodities analyst Nic Brown said.
“It is a case that any hints, any clues that are coming out of the Fed over when they might do it, whether they might do it are absolutely central to gold prices. There have been a few comments by FOMC members suggesting they are more prepared for QE, but the Fed minutes we got last night gave a much more balanced, more neutral view of things.”
The minutes of the June 19-20 meeting showed a few officials on the policy-setting Federal Open Market Committee thought recent softness in the economy was sufficient to justify bolder action. But the report suggested a majority of policymakers was not yet on board - at least not before last week's employment report, which showed a paltry 80,000 jobs were created in June.
Gold has fallen in six out of the last trading sessions, compared with seven daily declines in global equities .
The dollar rose to a two-year high against the euro in response to the minutes, which weighed on the gold price, given the extreme inverse relation prevailing between the two.
The correlation between gold and the dollar index is around its most negative in two years.
STUCK IN A RUT
In the last ten weeks, the gold price has struggled to break free of its $1,630-1,550 range and this week has traded in its narrowest band since late April, with less than $40 between intraday highs and lows, compared with a weekly average of nearly $84 so far this year.
“We see little change to bullion prices here, with attention turning to China's 2Q12 GDP estimates at the end of the week after today's release of Eurozone industrial production estimates for May as well as weekly US jobless claims,” Andrey Kryuchenkov, an analyst at VTB Capital, said in a note.
“As ever, the upside is limited at USD 1,620 and then at our key longer-term resistance at USD 1,630 while our intermediate support remains at USD 1,550. Our key short-term support is at $1,540/38, provided gold slips below $1,550.”
The mood in the gold market may be fairly pessimistic, but the options market suggests investors are betting on a recovery in the price of the metal this month.
The largest change in open interest over the last week has surfaced in $1,600 calls, options that give the holder the right, but not the obligation, to sell gold futures at this price by expiry on July 26.
Open interest in these options has risen by 977,000 ounces, effectively trebling and bringing combined call and put open interest at this strike price to 12,999,000 ounces and making this the largest at-the-money option.
A rise in open interest in calls above the underlying futures price suggests in theory that investors are betting on the price increasing over the coming couple of weeks.
Open interest in at-the-money puts, which give the holder the right to sell gold futures at a set price, have only increased marginally. The single largest put is $1,550, but open interest has only risen by 190,000 ounces, or 2.2 percent.
In other precious metals, silver fell 1.2 percent to $26.76 an ounce. The silver price is set for a fifth consecutive monthly decline, its worst run in 12 years. In this time, silver has lost a quarter of its value.
Platinum fell by 1.0 percent on the day to $1,410.25 an ounce, bringing its discount to the gold price to $160, its largest in three weeks.
Palladium was down 0.7 percent at $573.25 an ounce. - Reuters