"Critical" Week Ahead For "Gold Bugs" As Fed Meets, Bear Market "Continues"

LONDON gold in Dollars terms traded flat for the week Friday morning, holding around $1230 per ounce after what one analyst calls "a tumultuous few days."

Stockmarkets ticked higher but London's FTSE100 headed for a 1.5% drop on the week.

Silver also erased the last of its mid-week gains, which reached 5.0% yesterday morning, to trade back at $19.55 per ounce.

"Given the magnitude" of this week's spike and retreat, says brokerage and trading house INTL FCStone, "we think that gold now has a good chance of retesting its 2013 lows before the year is out.

"[Gold] may even have a shot of breaking it."

"Next week will be a critical time for the precious metal, and the beleaguered gold bugs still keeping the faith," says the note. Because the US Federal Reserve will announce its final policy vote of 2013 next Wednesday.

The Fed may start to taper its $85 billion per month of quantitative easing "in the near future," says Commerzbank in Frankfurt, pointing to this week's strong US retail sales data and the federal budget deal between Republican and Democrat politicians – "possibly as early as next week."

After the debt ceiling shutdown of October, "A smooth outcome in Washington poses several challenges for gold," reckons UBS analyst Joni Teves, forecasting a stronger Dollar, better economic growth and earlier tapering by the Fed.

"Lower gold after the taper, but a collapse is not likely," reckons Bart Melek, strategist at TD Securities.

"Gold should firm due to the Fed’s zero-bound [interest rate] policy," he writes. [Because] this should reduce real yield increases and keep the opportunity cost [of owning bullion, and so not receiving interest or dividend payments] from rising too sharply."

Reviewing 2013 overall, "The biggest downward pressure on gold this year," says the commodity team at French investment and bullion bank Natixis, "came from talk about Fed tapering and the improving US economy."

Furthermore, "Many of the key pillars which had previously supported the gold price began to erode" this year it says, pointing to lower central-bank demand, investment outflows from gold ETF trust funds, and the block on Indian demand due to government anti-import rules.

Rising mining costs, however, "will ultimately put a floor under prices at somewhere around $1150 per ounce." 

Adrian Ash

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(c) BullionVault 2013

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