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Gold prices hit 5-month low on taper worries

Gold prices hit 5-month low on taper worries

Gold traded near a five-month low on Tuesday as strong US economic data stoked fears of an early end to the Federal Reserve's monetary stimulus, and the metal appeared vulnerable to further declines as more data is due this week.

In India, gold for February delivery traded down 0.31 per cent at Rs 28,739 per 10 gram in on the Multi Commodity Exchange. Market analysts attributed the weakness in local gold prices to signs of strengthening in the US economy.

Spot gold slid 2.6 per cent on Monday - its biggest one-day fall in two months - after data showed a gauge of US factory activity hit a 2-1/2-year high in November and construction spending increased solidly in October.

The strong data could bring the Fed a step closer to scaling back its $85 billion in monthly bond purchases that have boosted gold's appeal as an inflation hedge. Markets fear the tapering could begin as early as this month when the U.S. central bank holds its policy meeting on December 17-18.

Physical demand picked up on Tuesday due to lower prices but did not match the levels seen during earlier price drops this year, dealers said.

"No one wants to make big bets towards the end of the year, especially when people are still cautious about when quantitative easing will end," said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.

"This is making people sell out of gold and invest in the stock market. And liquidations in exchange-traded funds have not stopped, so this is also hurting sentiment."

Spot gold edged up 0.2 per cent to $1,221.91 an ounce by 09.32 a.m. The metal fell to $1,217.39 on Monday, its lowest since early July, and also dragged silver lower by more than 4 per cent.

Data on US GDP and nonfarm payrolls is set to be released later this week and could further give clues about the strength of the economy, which has shown resilience despite a partial US government shutdown in October.

With a recovering economy and a stronger dollar, investors have been shifting money to equities. The top eight ETFs backed by gold - often seen as a safe-haven asset - have seen outflows of about 680 tonnes so far this year.

Gold has lost about 27 per cent of its value so far this year.

PHYSICAL DEMAND

Dealers said physical buying in Asia increased on Tuesday due to the sharp overnight drop in prices but many consumers were still on the sidelines as they expected prices to go lower.

In China, the largest buyer of bullion, premiums of 99.99 per cent purity gold climbed to $11 an ounce from $7 on Monday, but still far short of the $30-$40 levels seen in April-May.

US Mint sales of American Eagle silver coins in November fell 27 per cent year-on-year, while the Perth Mint's sales of gold bars and coins fell by nearly a third in the same period.