Gold Rally Stalls Ahead Of FOMC

On Monday, COMEX gold futures traded to the highest price levels since November 18 before retreating sharply.

After ending 2013 with a yearly loss of almost 30 percent, gold prices increased in January amid reports of rising demand for gold bars and jewelry in Asia.

However, speculation that the Federal Reserve may further reduce stimulus this week dampened the bullion rally on Monday. Further tapering of stimulus undermines gold's appeal as a hedge against inflation.

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The Federal Open Markets Committee (FOMC) starts two days of meetings on Tuesday and will announce at 2 p.m. Wednesday their decision on whether to continue tapering stimulus into February or to put it on hold.

The Fed announced in December that starting in January, it will taper its monthly bond buying to $75-billion from the $85-billion pace started in September 2012, citing "meaningful" progress in the jobs market. The news initially triggered a substantial sell-off in gold.

Speaking at the news conference following the announcement, Fed Chairman Ben Bernanke emphasized that Fed policy would remain data dependent, "On the first issue of $10 billion, again we say we are going to take further modest steps subsequently so that would be the general range but again I want to emphasize that we are going to be data dependent. We could stop purchases if the economy disappoints, we could pick them up somewhat if the economy is stronger.

While FOMC officials have given no signal the Fed will delay tapering this month, the December U.S. employment report was weak, giving a potential cause to put the stimulus reduction plan on hold. The U.S. Bureau of Labor Statistics reported U.S. non-farm payrolls missed expectations of 196.000 by a broad margin; coming in at only 74,000, the smallest gain in three years.

COMEX Gold Futures Daily Chart

Looking at the gold futures daily chart we can see that gold has enjoyed a rally since the beginning of 2014. However, at the time of this writing it has formed a bearish shooting star candle on the daily chart, ahead of the all important FOMC announcement due on Wednesday.