Gold drops as traders await For FOMC...

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Gold futures fell Monday, with analysts anticipating choppy price action as traders position themselves ahead of a Federal Reserve policy meeting later this week that will be closely watched for clues to the central bank’s next monetary-policy step.

Gold for August delivery GCQ3 -0.28% fell $5.90, or 0.4%, to $1,381.70 an ounce on the New York Mercantile Exchange. Particular focus will be on the FOMC [Federal Open Market Committee] meeting, considering the recent rise in government bond yields. We think risks for gold remain to the downside as central banks are unlikely to announce more easing,” said Valérie Plagnol, strategist at Credit Suisse.

Higher bond yields can make gold less attractive because the metal carries no yield. Higher bond yields can also make for a stronger dollar, which is negative for commodities priced in the currency because it makes those goods more expensive for customers holding other currencies.

Fed Chairman Ben Bernanke in May said that policy makers could move as early as the “next few meetings” to begin paring back the monthly bond purchases at the heart of the Fed’s quantitative-easing strategy. U.S. Treasury yields have risen substantially in the weeks since those comments, sowing turmoil across asset classes as investors grappled with the prospect of a cut in the central-bank-provided liquidity credited with helping lift gold, equities and other assets in recent years.

Most analysts, however, don’t expect the Fed to announce any tapering of its bond-buying program when the policy-setting FOMC concludes its two-day meeting on Wednesday. Bernanke will hold a news conference after the conclusion of the meeting. Read: Bernanke will try to herd wild markets at meeting.    

 Some strategists contend worries over tapering are overblown. And a story last week in The Wall Street Journal indicated Bernanke wants to reassure investors that an eventual tapering of the Fed’s bond-buying program won’t be accompanied by any immediate hike in interest rates, which are expected to remain near zero.

Gold prices have suffered from concerns the Fed will scale back stimulus efforts. Gold over the past few years has benefited from fears the Fed’s aggressive stimulus efforts would debase the dollar and boost inflation.

Meanwhile, overall investor flows remain bearish, wrote analysts at Barclays. They noted that outflows from exchange-traded gold products have slowed, but that tactical investors have scaled back gold exposure during the week ended June 11. But data show gross short positions are less than one lot off the record high seen only two weeks ago, they noted, which means scope for another short-covering rally remains elevated.

“The Fed quitting its stimulus programs might be feasible if the economy were truly on a massive recovery and inflation were rising,” said Keith Springer, president of Springer Financial Advisors, in a note Friday. “However, tame inflation and lower global growth estimates from the International Monetary Fund indicate the world’s central banks won’t pull back anytime soon.”

But T. Rowe Price said it believes the Fed is on track to begin reducing the pace of asset purchases during the summer quarter.

“The labor-market outlook has improved since the program’s inception in September, downside risks in the economic outlook have diminished, and a revival in consumer-credit-card footings is among reasons to have greater confidence in forecasts of a gradually improving growth profile,” T. Rowe Price chief economist Alan Levenson said in a report late last week.

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