Comex gold falls prey to year-end profit booking, stronger dollar

Gold on the Comex division of the New York Mercantile Exchange consolidated on Wednesday morning after US Treasury yields spiked in reaction to the controversial US tax compromise between the White House and Republicans.

Gold futures for February delivery were recently trading down $32.80 at $1,376.20 per ounce, just above the intraday low of $1,372.10.

In the US, President Barack Obama has agreed to extend Bush-era tax cuts for higher earners in exchange for the renewal of jobless benefits for the long-term unemployed and a one-year reduction in Social Security taxes.

The new tax plan still has to be approved by Congress and some Democrats have threatened to break with Obama and vote against the package.

Nevertheless, US Treasury 10-year note yields hit a six-month high of 3.253 percent on Wednesday as investors boosted their expectations for growth in the US. This led the dollar to rally to 1.3204 against the euro from 1.3258 on Tuesday.

A stronger dollar has coaxed funds into take a more defensive stance and place protective stops, George Gero, senior vice president at RBC Capital Markets, said.

"Recent [gold] buyers are very skittish and if momentum slows they tend to sell first and ask questions later," he said. The very high record prices are dimming profit opportunities going forward and sticker shock in jewellery over the holidays may dampen demand.”

Sterling Smith, an analyst with Country Hedging, said that profit-taking is to be expected given the perception that the market got ahead of itself.

"The markets will be vulnerable through the end of the year,” he said. “Also, this tax bill is probably making some people edgy. Their inclination is to take some profits early.”

"People are trying to figure out what it all means. There are also those who don't think it's going to happen as this bill isn't assured of passing," Smith added. “I think it will, but I'm sure there'll be a lot of hair-pulling, rock-throwing and kicking and screaming before the final vote.”

Some gold investors are also concerned that China could raise interest rates before the release of consumer price index (CPI) data over the weekend. China has warned that it will tighten monetary policy in the coming months.

This would be bearish for prices in that one of gold's main functions is as a hedge against inflation.

"At this point, it's more jawboning than meat-and-potatoes," said Smith about the rate rise speculation. "They're trying to curb speculation and slow down the economy a little bit but, when push comes to shove, they aren't going to be inclined to hike interest rates until sometime next year."

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