Copper, gold tread water ahead of Fed statement; tapering announced from Jan

Copper closed Wednesday at US$3.279/lb cash on the London Metal Exchange, down from the previous day's US$3.305/lb.

Markets have been in cautious mode ahead of the conclusion of the two-day US Federal Reserve monetary policy meeting on Wednesday afternoon.

Copper "is just losing a bit of ground but [prices] are basically just ranging. No one will take it on before the end of this meeting," a trader was quoted as saying by FastMarkets.

On Wednesday evening, after the LME had closed, the FOMC announced that from January it will reduce its monthly bond purchases to US$75bn from US$85bn by tapering its treasury purchases by US$5bn to US$40bn and its mortgage-backed securities purchases by US$5bn to US$35bn.

SURPRISE

The start of tapering in January was a surprise as most analysts were betting on next March. Capital Economics was one of the few that expected tapering to be announced on Wednesday, although it does not see dire consequences as tapering has "been on the table" for some time. "The bigger picture is that the Fed's monetary policy stance is likely to remain highly accommodative for an extended period," wrote Capital Economics' Jessica Hinds.

The decision to start in January was due to "economic activity expanding at a moderate pace," the FOMC said in a statement after the meeting. "Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated," the statement reads. "Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months."

If the data stays strong the committee will "likely reduce the pace of asset purchases in further measured steps at future meetings."

With Wednesday's close, copper is averaging US$3.322/lb so far this year.

Although markets in general are likely to react to the news of tapering, it is expected to negatively affect precious metals and gold in particular.

Gold closed Wednesday at US$1,230.50/oz on the London Bullion Market, while silver closed at US$19.94/oz.