Hedge funds turn decidedly bearish on gold

After a brief 2% jump in Asian trade, gold spent the New York session on Monday drifting sideways.

In late afternoon trade an ounce of gold was changing hands for $1,309, even for the day, but failing to claw back some of last week's more than 5% drop.

It was worst weekly performance for the metals since the end-June plunge to near 3-year lows of $1,182.

After a strong August for the gold price where the metal briefly exited bear territory, short sellers have re-entered the market ahead of this week's US Federal Reserve meeting.

Businessweek reports net-long positions held by hedge funds and other sizeable speculators – a bearish indicator – dropped 16% in the week to 10 September, the biggest fall recorded this year:

“The market is trying to find a price for gold in an environment where the Fed begins cutting back its assistance,” said Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York.

“The temporary sparkle that we had seen because of Syria is disappearing.”

The US central bank's meeting ends Wednesday and consensus is that the the Federal Open Market Committee (FOMC) will announce a relatively modest cut back of its stimulus program.

German precious metals trader and distributor Heraeus argues that while the Fed's tapering of quantitative easing – consensus seems to be a $10 billion reduction in purchases – has been priced in further downside risk remains:

However, in the current environment, we do not rule out that the gold price gives way again: A first psychological support is at 1,300 $/oz, but also a decline to 1,270 $/oz might be on the cards. Conversely, a temporary recovery is conceivable after the FOMC decision. In that case, the price level around 1,355 $/oz (100-day-moving average) poses a significant resistance.

The gold price has increased nearly 60% since QE1 was announced in December 2008 when the ruling price was $837 an ounce, but the metal has retreated some $370 in 2013.

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