Markets

Gold falls as rate hike speculation mounts

After recording back-to-back weeks of losses, the price of gold fell again on Monday as speculation grows that the Fed will hike interest rates soon
Gold bar and US dollar bills
A stronger dollar has hampered gold and other commodities in recent weeks

It seems we’ve gone back in time: gold is headed for another session of losses as the prospect of a US interest rate rise weighs on the precious metal.

At the start of summer there were similar murmurings of a rate hike from the Federal Reserve although Brexit made sure it didn’t materialise then.

The Fed policymakers meet on Tuesday and Wednesday to discuss, among other things, the possibility of a change in interest rates, and the markets are growing more and more confident that there’ll be at least one hike before 2016 is out.

Traders have increased odds of a rate rise before the end of the year to 47%, up from 41% only a few days ago, and up from only 12% at the beginning of July.

The yellow metal is particularly sensitive to an increase in interest rates because it raises the opportunity cost of holding assets like bullion which don’t pay any interest, while simultaneously boosting the dollar which the metal is priced in, making it more expensive to foreign currencies.

Demand for gold has softened in recent weeks according to Bloomberg, with purchases in gold-backed exchange traded funds (ETFs) slowing after hitting three year highs on 11 July.

The dollar, which generally pulls in the opposite direction to bullion, has enjoyed a strong period of late, with the dollar index (how the greenback compares to a basket of other currencies) posting three consecutive weeks of gains.

While the Fed isn’t expected to make any policy during this meeting, investors will be keeping a close on proceedings to try and work out its next move.

Trump victory could push gold towards US$1,850

Donald Trump has now been formally declared as the Republican nominee to become the next President of the United States.

Should Trump go on and clinch the vote later on this year, Dutch bank ABN Amro says the uncertainty it will cause could send the price of gold skyrocketing.

“His rhetoric and possible policy actions could create domestic and international uncertainty at best, and upheaval at worst,” said Georgette Boele, the bank’s coordinator of forex and precious metals strategy.

“The US economy would be weaker than otherwise [and] foreign investment would likely be hurt.”

Boele added: “This will likely result in a more substantial rise in gold prices towards US$1,860 an ounce over the coming years.”

At close of play in London, gold was down US$8 to US$1,314, silver was down 30c to US$19.33, while platinum was also down US$11 to US$1,068.


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