Gold prices fell more than 1 percent on Thursday, failing to sustain gains made after the Federal Reserve unveiled a fresh round of bond purchases, as investors switched focus to the prospect of a looming US fiscal crisis. The precious metal hit a two-week high late on Wednesday after the Fed said it planned to buy $45 billion in longer-term Treasuries each month on top of the $40 billion monthly purchase of mortgage-backed securities it announced in September.
But Fed chairman Ben Bernanke also warned that monetary policy would not be enough to offset the damage to growth if talks to close the fiscal deficit in Washington failed, triggering mandatory tax increases and spending cuts. Gold quickly dropped in line with other markets as the new stimulus measures were overshadowed by concerns that the budget talks might fail to head off what would be a crushing blow to growth. Traders cashed in gains ahead of the year-end, with the statement containing few surprises to justify a stronger rise.
"Gold is tracking other risk assets at the moment," said Andrey Kryuchenkov, analyst with VTB Capital. Spot gold fell to a low of $1,688.94 an ounce and was down 0.8 percent at $1,697.49 an ounce at 1521 GMT, while US gold futures for December delivery were down 1.1 percent at $1,698.90.
"A difference between previous rounds of QE, and the latest monetary stimulus announcement, is that US unemployment was rising or flat before, but has been falling lately," Mitsubishi analyst Matthew Turner said. Gold benefits from easy monetary policy as it keeps up pressure on longer term interest rates, fans fears over inflation, and can undermine confidence in paper currencies. The precious metal has risen nearly 9 percent so far this year.
"The temptation to lock in profits as we near year-end was strong, and gold sold off," said UBS in a note. "But despite the decline... we don't think the sentiment towards gold has actually turned negative. Gold is likely to remain rangebound, as many investors are closing books for the year, while the difficult US budget talks keep them away from big bets.
Dealers anticipated physical buying interest in gold would kick in below the psychological $1,700 per ounce. Buying in India increased on Thursday as local prices hit a one-week low. "Physical demand out of India has been only part of the resurgence we've seen," Standard Bank said in a note. "Sustained and strong demand out of South East Asia has also played a significant and more stable role in the physical gold market."
Among other precious metals, silver was down 2.6 percent at $32.58 an ounce, while spot platinum was down 1.4 percent at $1,609.74 an ounce. Spot palladium was down 0.4 percent at $689.50 an ounce. Palladium, which has outperformed other precious metals this month after lagging for much of the year, hit a one-week low at $675.90 an ounce in earlier trade.
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