Gold "Fierce" If Fed Surprises, Investment Banks Urge "Sell" as Traders "Spooked"

The WHOLESALE price of gold fell below $1300 for the first time in 6 weeks Wednesday morning in Asia, as traders in all markets awaited today's US Fed announcement on QE tapering.

Regaining that level in London – a record high when first reached 3 years ago next week – gold still held 7% beneath the start of September.

The US Dollar held flat meantime, as did US Treasury bonds.

World stock markets ticked up with commodities. Silver rallied 20c from an overnight low at $21.37 per ounce.

"Any surprise [on Fed tapering] could push gold prices fiercely in either direction," says a commodity trading desk's note.

Longer-term, "Tapering really removes the upside case for gold," reckons UBS commodity analyst Daniel Morgan in Sydney, speaking to Bloomberg.

"I don't see any big reasons to be bullish on gold in the short term."

Going further, analysts at Societe Generale today say that "Rate hikes will follow tapering, markets are too complacent," in a new cross-asset strategy report.

Recommending 7 key trades, "Switch out of emerging markets and associated commodities," the French investment bank and London bullion market maker says.

"Sell gold now," SocGen's report adds, pointing both to Fed tapering and "lower sovereign risk from the Eurozone."

Shorter-term ahead of today's US Fed policy statement, "A large part of the market is already short in anticipation of [tapering], says David Govett at brokers Marex.

"[So] if no taper is announced, gold will shoot straight back up as all the shorts run for cover," Govett believes, forced to close their bearish bets at rising prices.

Surveys and economists' comments today put the consensus expectation for QE tapering at $10-15 billion, cut from the current level of $85bn per month.

"If this [proves] the case gold is unlikely to come under further pressure," writes Eugen Weinberg's team at Commerzbank.

"Of greater importance will be the way Bernanke steers the market's expectations of future monetary policy measures [in his 14:30 ET press conference]."

But "we tend to believe," counters a note from London market-maker HSBC, "that the bulk of gold declines based on tapering are already largely factored into current prices."

After an initial knee-jerk drop, "[only] a heavier tapering program on a more limited timetable could lead to a second-round of sales," its precious metals analysts say.

UK policy makers at the Bank of England voted 9-0 this month to keep their quantitative easing unchanged, minutes from the Sept. meeting showed Wednesday morning.

As recently as last month, some members of the committee had seen a "compelling" case for extending the current £375 billion in QE – now used to buy one-third of all UK government debt in issue.

"As monetary conditions normalise," reckons Kevin Gardiner, Barclays' chief investment officer for Europe, "[gold] investment demand is expected to weaken while physical demand growth from India will likely remain soft."

World No.1 gold consumer India yesterday saw import duty on gold jewelry raised to 15%, giving domestic manufacturers a price advantage as gold bullion duty stayed at 10%.

"[Such] bearish news articles doing the rounds have precious metal investors spooked," says analyst Moudi Raad at refining and finance group MKS in Geneva.

Looking at the broader natural resources market, however, "Commodities continue to provide diversification versus stocks and bonds," says a new article from portfolio managers Nicholas Johnson and Greg Sharenow at Pimco, the $2 trillion California-based bond and asset management firm.

"[Commodities] are also one of the most potent ways to hedge against unexpected changes in inflation."

Adrian Ash

(c) BullionVault 2013

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