Gold price drops to 2-week low as Fed opens door to faster tapering

Gold erased more than two weeks’ worth of gains on Monday, pressured by a firmer dollar and expectations that the US Federal Reserve may accelerate the pace of policy tightening to combat inflation.

Spot gold was down 1.6% to $1,816.91/oz by noon ET, after falling to its lowest since Nov. 5 at $1,812.09/oz earlier in the session. US gold futures declined 1.8% to $1,818.10/oz in New York.

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Bullion’s latest pullback comes after comments from Fed Vice-Chair Richard Clarida last week suggested that the central bank would table the idea of tapering its asset purchases in the upcoming December meeting.

“In the short- to medium-term, gold’s fundamentals look good because real (inflation-adjusted) yields are so negative, but eventually we’ll get tighter monetary policy and gold will trend lower in the bigger picture,” IG Markets analyst Kyle Rodda said in a Reuters report, adding:

“There’s also a growing sense that the United States and China are going to intervene to bring oil prices lower, one of the biggest drivers of inflation expectations, and this has weighed on gold’s momentum around its role as an inflation hedge.”

Higher interest rates generally translate into an increased opportunity cost of holding the non-yielding gold. Further pressuring bullion was a stronger dollar index, which made the metal more expensive for holders of other currencies.

“But with inflationary pressures reflecting only in short-dated (US bond) rates, only more officials jumping on to a faster-taper narrative, or a sudden move higher in longer-term US yields is likely to derail gold’s rally,” Jeffrey Halley, senior market analyst at OANDA, said in a note.

However, Halley also said a move towards $2,000 in gold before the December Fed meeting can’t be ruled out.

(With files from Reuters)