Gold, Silver Slump as U.S. Data Add to Fed Easing Worries

December 2, 2013

San Francisco (Dec 2)  Gold and silver fell to the lowest levels in almost five months on Monday as investors bet that upbeat manufacturing data pointed to an unwind of Federal Reserve stimulus.

The Institute for Supply Management's gauge of U.S. manufacturing activity showed the sector unexpectedly accelerated last month. The data were the latest evidence that despite an uneven global economic recovery, the U.S. economy is chugging along at a rate that may continue to limit demand for assets such as precious metals.

The most actively traded gold contract, for February delivery, fell $28.50, or 2.3%, to settle at $1,221.90 a troy ounce on the Comex division of the New York Mercantile Exchange, the lowest since July 5. Silver for March delivery slumped 3.7% to $19.289 an ounce, the lowest since July 10 and a step further into bear-market territory.

Precious metals, which offer no guranteed yield, tend to move inversely to U.S. interest rates and the dollar, analysts say. Rates and the greenback both were higher after the U.S. manufacturing report.

Gold is on track for its first annual loss since 2000, largely on the view that an improving U.S. economy will push the Federal Reserve to throttle back its stimulus. That, in turn, may raise interest rates and limit the appeal of gold as a store of value, analysts say.

"You've got a preponderance of bears in the gold market," said George Gero, a vice president and precious metals strategist with RBC Capital Markets. Short of sudden political turmoil, "I don't see anything that's going to cause a Santa Claus rally for gold. What a dim beginning to December for gold and silver."

Stimulus programs such as the central bank's current $85 billion-a-month bond-buying program had supported gold prices since the 2008 financial crisis as investors sought the metal as a hedge against the inflation that could follow. But inflation has been muted even as U.S. stocks surged to record highs, helping draw investors out of gold.

"This latest [manufacturing] survey provides the Fed with further evidence that the economic outlook is improving," said Amna Asaf, an economist with Capital Economics, in a note. Ms. Asaf said that the stronger reading favors an earlier end to the Fed's stimulus program.

Investors are likely to continue to gauge the likely timeline for a reduction in the Fed's stimulus this week with the release of closely watched economic data. The Federal Reserve's beige book--a report on regional economic activity--is due Wednesday, and the monthly U.S. jobs report on Friday. Meanwhile, the policy arms of the central banks of Australia, Canada, England and the European Union are expected to announce monetary-policy decisions this week.

Platinum also retreated to a near-five-month low. The January-delivery contract slid 1.6% to $1,346.80 a troy ounce on the Nymex, the lowest since July 5.

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