Gold edges up after losses as investors take Fed taper in stride

By A. Ananthalakshmi SINGAPORE (Reuters) - Gold posted a small recovery on Thursday after overnight losses prompted by the Federal Reserve's decision to pare its stimulus, indicating investors may have already priced in the U.S. central bank's move. Gold's reaction to the much-feared reduction in the Fed's bond purchases also showed that the metal was unlikely to deepen a 27 percent loss this year - its first annual drop in 13 years. Many in the market had expected the Fed to begin tapering its $85 billion in monthly bond purchases only in March but they could not completely rule out a December tapering as economic data coming out of the United States was strong. Spot gold had risen 0.2 percent to $1,219.85 an ounce by 0309 GMT. It had risen as much as 0.7 percent earlier, after dropping 1 percent on Wednesday. "The $1,200 level in gold already reflected the taper talk. That's why when the announcement came, it didn't fall as much as feared. The market already expected either no tapering or a very light taper," said Helen Lau, an analyst at UOB-Kay Hian Securities in Hong Kong. U.S. gold declined 1.3 percent on Thursday. Silver futures fell nearly 3 percent. Other markets reacted surprisingly well to the taper decision, with Wall Street stocks at record highs and Asian shares rallying on Thursday. The dollar was above 104.00 yen for the first time since 2008. On Wednesday, the Fed trimmed the pace of its monthly asset purchases by $10 billion to $75 billion, and sought to temper the long-awaited move by suggesting its key interest rate would stay at rock bottom even longer than previously promised. Bullion had been supported by the Fed's stimulus as the bond purchases burnished its inflation-hedge appeal. Spot gold has hit multi-year lows several times this year on either strong U.S. economic data or speculation about the timing of the stimulus cut. Short positions by speculators on U.S. gold futures and options are close to 7-1/2-year highs and holdings of the biggest gold-backed exchange-traded fund are at their lowest in 4-1/2 years, showing that investors were already well prepared for the tapering eventuality. "There won't be much upside going forward but I think there is a strong support at current prices," said analyst Lau. Another trader in Hong Kong said sentiment towards gold is still fragile and a drop below $1,210 could trigger stop orders, potentially pushing prices towards the year-low of $1,180.