The depreciation that gold experienced on Nov. 27 illustrated the key role that tapering speculation plays in the price of the metal, and how the expectations surrounding the eventual reduction of this stimulus are impacted by the release of economic data.
Individuals who want to make money by trading gold might benefit from being aware of the relationship between these various factors. People who want to take part in such activities should be aware that gold is frequently thought of as being a safe haven asset, and if economic news that makes people more risk averse is released, they have a tendency to seek this precious metal as a store of value.
Economic data crucial to tapering speculation
The data that is released related to the economy also has an impact on the speculation surrounding the future plans of the Federal Reserve in terms of quantitative easing. Information that points to economic strength makes it seem more likely that the central bank will be able to taper these bond purchases sooner rather than later.
Alternatively, data that indicates weakness in the general business climate makes it seem like the purchases of the Fed will need to be conducted for some time. Speculation such as this, that the financial institution will use these transactions for an extended period, is generally thought of as providing upward pressure for the precious metal. However, predictions that QE will be cut short in the near future are frequently considered bearish for gold.
Consumer data and QE expectations
A perfect example of robust data pushing gold lower happened on Nov. 27, as consumer sentiment improved in November, according to Bloomberg. During the month, the Thomson Reuters/University of Michigan final index of consumer sentiment experienced an increase that exceeded expectations. The strength of this data bolstered hopes that QE will be tapered sooner rather than later. This provided downward pressure for the precious metal.
"The U.S. confidence number is telling us that the economy is on the right track, and that's not so good for gold," Bart Melek, head of commodity strategy for TD Securities in Toronto, told the news source. "While physical demand is a nice story, the support from it is limited."
Another factor that helped to boost speculation that the bond purchases of the Fed will be reduced soon was jobless data provided by the U.S. Department of Labor, which revealed that during the most recent week, the number of these initial applications for unemployment assistance experienced an unexpected drop, according to Reuters. ABN Amro analyst Georgette Boele noted that the impact that information such as this has on the value of the precious metal.
"Gold remains very sensitive to the U.S. data, and we saw that it cut initial gains after today's mixed numbers,'' Boele told the news source. "It looks like investors are looking for reasons to push the price lower, and any bounce higher runs quickly out of steam.''
Individuals who want to make money by trading the precious metal can benefit from knowing that the strength of future economic reports will be important to when QE is tapered, and therefore the future of gold prices.
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