Gold came under selling pressure in early New York trading, sliding from a six-week high established on Monday at 1258.35. The yellow metal was weighed by firmer yields and a higher dollar, amid heightened expectations that the Fed will proceed with tapering this month.
In the wake of the bad December employment data, expectations had risen in recent weeks that the Fed would hold off on any additional tapering for the time being. Such expectations were diminished by the latest article by The Wall Street Journal FedWatcher Jon Hilsenrath, whoe wrote: “The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year…”
The dollar index pushed to a new ten-week high and Treasury yields edged higher as U.S. traders returned from the long holiday weekend. While Hilsenrath contends that the motivation for continued tapering is the Fed’s own expectations for “solid U.S. economic growth this year,” the minutes of the December FOMC suggest that the diminishing efficacy of QE might just be the more important driver.
If the Fed is indeed “tapering into weakness” as Tangent Capital’s Jim Rickards suggested last week, we could begin seeing signs of deteriorating data in the not too distant future. Certainly pulling back on monetary accommodations at this point is not going to ameliorate the mounting concerns about deflation/disinflation risks (see Friday’s DMR). It will be an interesting day indeed if new Fed president Janet Yellen is put in a position where she has to un-taper.
It didn’t take long for the greenback and yields to start retracing their intraday moves higher. This helped gold find support ahead of last week’s low at 1234.00. The yellow metal had posted weekly gains each of the three weeks in 2014 thus far. We’ll see if gold can snap back from this little pullback and make it four.