We are experiencing significant weaknesses in the gold market ahead of the FOMC meeting on September 17-18, as the gold futures have plunged 4.05% this week. This is attributable to three bearish factors:
1/Increasingly market participants expect that the Fed will start tapering from September (an initial reduction of $10bn a month in asset purchase) as the U.S. economy is improving.
2/Gold is experiencing strong technical selling pressure. The $1,350 level was broke and triggered many sell stops. Gold is trading at $1,316 an ounce on September 13.
3/Syria tensions are declining. As Syria has just accepted Russia's proposal for Syria's chemical weapons to be given up for UN control, the probability of a U.S. military strike becomes small.
As the market has already priced in the FED tapering, gold is likely to rise after that because:
1/The U.S. debt ceiling is going to come back on radar screens of gold traders as we approach the limit in mid-October and Obama said that he will not negotiate over the debt limit and he is asking Congress for a straightforward increase. A sharp increase in gold prices is then very likely as it happened in 2011 when the debt ceiling crisis hit and people were buying gold like crazy. Moreover, a strong bounce in gold would be in line with its seasonality pattern as going back to 1999, September has been best month for gold.
Source: Frank Holmes
2/Supply and demand metrics suggest gold price appreciation going forward according to the GFMS Gold Survey . The gold market is experiencing strong physical demand (offsetting a decrease in investment demand) with reduced scrap supplies. Moreover, China will become the metal's number one consumer as it is on its way to import 1,000 tonnes of gold for 2013. As all-in-all costs of production are estimated at $1,250 an ounce, this level is a very strong support for gold.
To sum up, gold prices could continue to head lower before the Fed decision comes out, then gold is likely to rally due to debt-ceiling discussions in the U.S. and strong physical demand.