Bullion has been taking a brutal hit after the Fed’s hinted of a possible early pull back from its asset purchase program, by sometime late this year. As a result, gold prices in global markets seem to have plunged into a free fall, with prices declining continuously last week.

However, there was a slight hint of a silver lining as gold prices along with silver rallied for a short while to pare back some of its losses by 1.7% and 3.1% in the London trade markets respectively. This was apparently due to a slight good show in the European Markets that had a fall out in the commodities.

The reason behind such an extended period of rout against the bullion is something to think about. First of all, the main culprit is the FOMC and Bernanke’s statement about the possible tapering of QE policy. Secondly, the Chinese economy alarmed the markets by showing signs of contraction. With their May final PMI and the HSBC flash PMI readings staying below the critical mark of 50, it was a clear sign of some trouble brewing in the Asian powerhouse.

China one of the leading bullion consumers, has been making huge gold imports for past few months. Also, the signs of a credit squeeze in China due to a change in its Central Bank Policy, which in turn spiked the short-term interest rates, further hurt the already declining gold prices. With a newly strengthened USD rallying against all its major trading currencies, investors had little reasons to hedge in gold.

Additionally, the downfall in currencies of emerging economies like India, which is the number one retail market for Gold, grossly reduced their purchasing power. This eroded all the demand support for gold from the Asian markets and any chance of rally to pare back its losses.

These events have definitely forced major financial institutions to cut back on their bullion forecasts. The London Bullion Bank HSBC cut back its gold forecasts for 2013 by 10% down to $1396 / ounce and to $1435/ ounce for 2014. Meanwhile, other market-makers like Deutsche Bank reduced its forecasts for Gold by 7% to $1431 per ounce, with Morgan Stanley slashing their Bullion forecast by 5% to $1409.

However, there seems to be some ray of hope for bullion prices, sort of a respite from this relentless pummeling at the hands of a strengthening USD. This respite comes from none other than a member of the Fed Reserve that is responsible for this gold rout. According to Narayana Kocherlakota of the Minneapolis Fed, a non-voting Fed member, the Federal Reserve plans to keep the short-term interest rates unchanged and accommodative for quite some time, even after a complete end to the easing policy to further strengthen the US economic recovery.

The Chinese Central Bank again has come up with a statement that it is ready to lend to any Bank in China that is facing a credit crunch. Furthermore, the outgoing Bank of England governor Mervyn King in his statement to the UK parliament said that the interest rates and the Central Bank’s asset purchase policy is not going to be normalized in the near future.

Gold has always been a safe haven for a hedge against the fluctuations in the stock and currency markets. If the current impacts of the mere hints of a Fed pullback are any sign, the markets will be in more chaos when the Fed actually tapers its asset purchase late this year. Investors then will definitely seek a safe haven and the demand for bullion is again bound to increase.  

All of these are definitely some bright spots in the current gloomy forecast for bullion prices. Probably mirroring these silver linings for bullion, Russell Browne, market-maker Scotia Mocatta's strategist, opines that there is a good possibility of rebound in the gold prices. According to Browne, gold is definitely on a free fall until it reaches a target range of $1155-1156, from where there is good chance of a rally in the bullion prices.

Note: This blog is just an expression of the author’s opinion and cannot be deemed responsible for any losses incurred.