Gold price bulls surrendering

Gold is now approaching more than 3-year lows struck at the end of June when the metal briefly traded below the crucial $1,200 level.

Gold’s current weakness – it is down more than 3.5% so far this week – is due to comments from members of the the US Federal Reserve that have put a quick end to the central bank’s monetary stimulus program back on the table.

Minutes from the US Federal Open Market Committee’s end-October meeting released on Wednesday coupled with comments made by Fed Chairman Ben Bernanke and St. Louis Fed President James Bullard indicated that cuts to the quantitative easing program could come as soon as December.

The minutes showed that nominee chair Janet Yellen, who during nomination hearings last week was broadly supportive of the Fed’s quantitative easing (QE) program, may be in a minority when it comes to deferring any tapering of the $85 billion being pumped into financial markets each month.

The easy money sloshing around in financial markets – Fed QE purchases are set to top $4 trillion by the end of the year, while programs in Japan, the EU and the Bank of England have contributed more than that – boosts bullion’s reputation as a hedge against inflation and as a storer of wealth amid the debasement of paper currencies.

But with Wednesday data showing inflation in the US falling to the lowest level in more than 45 years and taper talk strengthening the dollar, important factors stopping the gold price from sliding lower have now been removed from the equation.

The precious metal’s weakness also comes as institutional money continue to exit the market in droves.

Other metals are also badly lagging equities, with silver down a third this year barely holding onto the $20 an ounce level and the spot copper price down 11%.

Large investors like hedge funds have cut their net-long positions in the yellow metal by almost half during a two week period up until November 12, making big bets that the gold price will decline.

Gold-backed ETF holdings of the metal have also dropped by 19 tonnes in November to the lowest level in more than three-and-half years.

The extent to which investors have abandoned gold-backed ETFs is most striking when you consider the world’s largest gold ETF, SPDR Gold Shares (NYSE: GLD).

Holdings in the fund established November 2004 are now at their lowest level since February 2009 even though net redemptions have slowed dramatically from the torrid pace of earlier in the year.

As of Friday GLD has experienced year-to-date outflows of 485 tonnes to 865.7 tonnes, down just under 36% from the start of the year.

Large investors are opting to put their clients’ money into the US stock market which continues to set new highs.

The Dow Jones Industrial Index closed above the 16,000 mark for the first time ever on Thursday.

In 2013, the Standard & Poor’s index of the 500 largest companies in the US, is up some 30%, while gold has retreated 26% from its opening levels of $1,677.