Gold price drops again as December ETF outflows hit 17 tonnes

The gold price slumped more than $30 or close to 2.5% an ounce on Thursday as a December taper of US monetary stimulus begins to look more likely and liquidation of gold-backed ETFs continue apace.

On the Comex division of the New York Mercantile Exchange, gold futures for February delivery traded at $1,226.80 an ounce during lunchtime dealings, down $30.40 from yesterday and not far off the day's weakest level of $1224,20.

Dealings were brisk, with over 130,000 futures changing hands compared to a daily average of 150,000 contracts by 12:50 EST.

A likely deal on a budget from US lawmakers which would avert a government shutdown, has removed a substantial hurdle for the Federal Reserve to start winding down its quantitative easing program that has pumped $4 trillion of easy money into the US economy.

The Fed has been reviewing QE and is eager to throttle back asset purchases at the first signs of a solid economic recovery in the US and without the threat of a repeat of a October's political mess, the bank could start to taper the $85 billion a month program as soon as next week at its final meeting for the year.

Bond yields on the 10-year remain around 2.8% and should the Fed start cutting back it is likely to rise, giving further impetus for investors to dump gold for higher yielding assets.

Something that hedge funds and larger investors in gold have been doing consistently since April.

Another 17 tonnes have left gold-backed exchange traded funds in December, with holdings of the world’s largest gold ETF, SPDR Gold Shares (NYSE: GLD) already down just under 10 tonnes.

Bullion held by the fund established November 2004 are now at their lowest level since January 2009.

Net redemptions slowed dramatically from the torrid pace of the second quarter, but started picking up again in October. GLD has experienced year-to-date outflows of 517 tonnes or 16.6 million ounces to 833.2 tonnes, down some 38% from the start of the year.

The continued outflows from gold ETFS also come after data from US Commodity Futures Trading Commission showed hedge funds are now the least bullish on the yellow metal since 2007 when gold averaged around $700 an ounce.

Net-long positions held by commercial gold traders – bets that the price will rise – fell by 16% to a mere 26,774 contracts last week data from Danish investment bank Saxo shows.