Gold Bugs Squashed By Taper

Gold and silver prices broke down on Thursday, nearing the lowest levels of the year. The Canadian dollar led the way higher in the biggest post-FOMC bounce while the kiwi lagged despite strong GDP data. The Asia-Pacific week winds down with a quiet calendar.

Some traders were looking for a continuation of dollar strength on Thursday, others were looking for a retracement but the market delivered neither. EUR/USD stalled ahead of 1.3700 on a modest rebound and then sagged back to 1.3655. USD/JPY was challenging the post-Fed high of 104.36 but soft US economic data halted the rally and the pair traded in a tight range down to 104.10.

Three pillars of expected US economic strength for 2014 are manufacturing, employment and housing and there were questions about all three in economic data. The Philly Fed was at +7 compared to +10 expected, initial jobless claims rose to the highest since March at 379K compared to 336K expected and existing home sales slipped to 4.9M versus the 5.02M consensus. The numbers are far from game changers but could be seeds of doubt in the rapidly improving consensus about 2014 US growth.

The big move on the day was in the gold market as prices fell $30 to $1189. The spike low in late June was $1180 and below that support thins. The breakdown Thursday easily cut through the Dec low of $1210, the mid-June low of $1208 and the psychological $1200 level.

The long-term gold rally was built on expectations for inflation, deficits, the potential for economic calamity and money printing. All of those factors are in decline and if/when gold breaks $1180, it will continue to decline as well.

One event to watch for in Asia is the BOJ's announcement of its monetary base target for 2014. The consensus is 270trillion yen. The tight range in USD/JPY could also be shattered by a move in the Nikkei 225.