Gold Market Slumps In Anticipation Of Tapering, And Don’t Forget Coming Fights Over Budget and Debt Ceiling, Too!

Gold markets have slumped this week as investors obsess over the Federal Reserve’s reduction in, or tapering of, asset purchases, a move expected during its September meeting early next week.

“Gold market participants are currently fixated on the fast-approaching FOMC [Federal Open Market Committee] meeting,” wrote UBS AG (VTX:UBSN) gold analyst Joni Teves in a note on Friday.

“The nearly 6% decline in gold prices this week is not only reflective of the unwinding of Middle East safe-haven bids, but also increasing positioning ahead of an anticipated Fed-tapering announcement,” she said.

Gold future contracts fell at the sharpest pace in nine weeks, reported Bloomberg, after recent strong economic data increased the likelihood of tapering this month.

That comes after a choppy summer for gold, which saw a modest revival from April lows and some summer strength on concerns about a military intervention in Syria.

Still, tapering will come as no surprise to gold investors or the broader market. Even though many analysts argue that tapering has already been priced into the market, however, details of any tapering timetable released next week will set off gold bugs and bears alike.

Gold could even fall below $1,000 per ounce, which hasn’t happened since October 2009 in the gold futures market, according to remarks from Goldman Sachs Group Inc (NYSE:GS).

September also packs two unfolding political events, which the gold market may have paid less attention to, but which could impact prices.

U.S. debt ceiling and budget fights, especially if they aren’t speedily resolved, could push gold slightly upward, as investors emphasize its role as a safe haven investment.

U.S. debt ceiling levels and revisions may be connected to the price of gold.

“Once the debt ceiling is raised, then that will be another trigger for gold to rise again,” former U.S. Mint director and Morgan Gold chief strategist Edmund Moy told International Business Times in August. “That’s why the debate this fall about raising the national debt ceiling is important to the future price of gold.”

But Teves observed that many players in the gold market are likely feeling complacent about the political pseudo-battles, since in the past, solutions have always emerged at the last minute.

“Previous experiences of brinkmanship on the debt ceiling have until this point always resulted in resolutions emerging at the 11th hour,” Teves wrote. “Expectations are that the same will happen this time.”

Goldman Sachs analysts stated on Thursday that they expect a dovish taper of $10 billion less in bond buying, with this year’s debt-limit debate likely to be less disruptive than 2011’s edition.

Equity markets will continue to rally, they wrote, with gross domestic product figures more strongly affecting stock markets than any policy or political events over the next few months.