Market Insider

Gold is just the tip of the 'Taper Tantrum'

Newly manufactured gold bars sit in storage racks ahead of stamping at a precious metal refinery near Mendrisio, Switzerland.
Gianluca Colla | Bloomberg | Getty Images

Look no further than Thursday's trading in to see a market throwing a taper tantrum.

November's stronger-than-expected retail sales gave another boost to the idea the Fed could begin to slow its bond buying this month. The 0.7 percent rise beat the 0.6 percent expected but also shows that sales extended beyond autos, which were at a six-year high in November.

Gold slumped more than 2 percent, while stocks and bonds also sold off. The and Dow were both lower since the opening bell, and the Nasdaq and Russell 2000 gave back early gains in afternoon trading. Treasury yields rose, with the 10-year edging above 2.88 percent.


Mark Luschini, chief investment strategist at Janney Montgomery, said that Congress crafting a budget deal also helped fuel the view that the Fed could act to pare back its bond-buying at its meeting next week.

(Read more: Gold in 'flux' until taper timeline gets clearer)

Taper and the markets
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Taper and the markets

"These things collectively are setting up the Fed to not have to defer to prospects of fiscal impasses and weak economic data," he said.

In a survey of market participants, Nomura found that 37 percent believe the Fed could taper its $85 billion monthly bond purchases in December—well above the level found among the primary dealer community in an earlier Reuters survey.

CNBC's Steve Liesman has also reported this week that the Fed is likely to take action at the meeting to slow quantitative easing.

Nomura said its clients were closely split between Fed action in December, January and March, but that most believed it would enhance its forward guidance in December or January. The Fed is expected to emphasize its intention to keep short-term rates ultralow for a long time while winding down the bond purchases that have affected longer-duration securities and yields.

(Read more: Goldman predicts steep losses for gold in 2014)

The gold market is shifting toward that view, according to Jim Steel, chief commodities analyst at HSBC.

"It was boosted up until today by a fairly decent short covering rally," he said. "The short positions are very heavy, and it didn't take much for the market to jump back. But as the chatter about tapering has increased, with the market mood sort of shifting a little bit toward increased chances for Fed tapering in December, that has really taken the green off of gold and that explains the selling."

Why investors look forward to tightening
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Why investors look forward to tightening

Gold futures for February were at $1,230 late Thursday morning after dipping to $1,224 an ounce. Steel said there is support at the recent lows of $1,220.

While the odds of a December move by the Fed seem to be rising, many economists do not believe the chances are high of action this month and see March as the more likely time frame.

"It's a close call next week," said Mesirow Chief Economist Diane Swonk. "I still think they need to lay the groundwork. I still say it's 50/50. I'm not going beyond that. I do think they have some explaining to do."

While some data, including employment figures, look better, price deceleration is a problem for the Fed. The lack of inflation also weighs on gold.

The November retail sales report highlights a problematic divide within the economy.

"The good news is the big-ticket stuff is selling. That goes into production; it goes into better jobs. This may even be better for college grads. You're getting better momentum, but the break is there's still two economies," Swonk said.

"You see why, for traditional retailers, they're so jittery. It's not holiday spending. It's residual earlier home sales spending and demand for vehicles," she said. "When you look at the traditional holiday stuff—not so great."

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.