Gold price drops to one month low ahead of Fed decision

Gold dropped to levels last seen mid-May on Tuesday, giving up as much as $23 an ounce to touch $1,360 in New York, ahead of the US Federal Reserve's decision on monetary policy.

Gold investors are worried that chairman Ben Bernanke could announce on Wednesday that the Fed will start tapering off its quantitative easing program.

QE, which floods markets with cheap money, burnishes gold's status as a storer of wealth.

The first QE program was announced by Bernanke in December 2008 when an ounce of gold cost $837.50.

Even with the dramatic sell-off on precious metals markets this year, an ounce of gold is still worth 60% more than before QE.

But if the US central bank now dials back its uber-loose monetary policy it would strengthen the dollar and send gold in the other direction.

The Fed's balance sheet crossed the $3 trillion mark early into 2013 through the buying of Treasurys and mortgage bonds to the tune of $85 billion a month.

If the central bank's program remains in place unchanged, the Fed's assets buying bill will top $4 trillion before the end of the year.

Gold has declined more than 18% this year following unprecedented outflows from gold-backed exchange traded funds and early indications that QE may end sooner rather than later.

ETF holdings of gold have declined to the lowest in more than two years and some 500 tonnes of the metal have been withdrawn since holdings hit a record of more than 2,600 tonnes in December 2012.

While the outflows have slowed, investors are continuing to abandon gold in favour of riskier, income-producing assets like stocks which in the US are at all-time highs.

Gold is now firmly in the grip of the bears and if and when the Fed slows down the dollar printing presses it would remove a significant factor that has been keeping a floor under the price.