Gold prices dipped to their lowest in more than two years on Friday, as expectations of a significant US interest rate rise next week, along with a strong US dollar, weighed on prices.
With bond yields expected to go higher, some investors have sold out of gold and moved into other assets, particularly dollar-denominated ones.
“Until recently, gold has managed to fend off the news,” said Ole Hansen, head of commodity strategy at Saxo Bank. “But just recently it has broken lower; there is a lot of technical trading in that.”
Negative economic news, including the US Consumer Price Index on Tuesday, has contributed to the expectation of a significant increase in borrowing costs when the US Federal Reserve meets next week.
On Friday, the spot gold price briefly fell to $1,654 per ounce, which is 19 per cent below its recent peak in March, and 8 per cent lower than its price at the beginning of this year. It recovered slightly to $1,673 by the London afternoon.
Unlike most other commodities, gold prices move primarily in response to economic trends rather than underlying physical demand.
The unexpected US CPI numbers, combined with slowing jobs growth, and rate rise forecasts have weighed on the gold market.
“People are paring back and rebalancing . . . looking at bonds, and dollar-denominated assets,” said Joseph Cavatoni, chief market strategist for the World Gold Council.
“Everything has had a wild week in terms of price performance,” he added. “You are seeing a lot of volatility, and the same with gold.”
The strong dollar has put pressure on gold and other commodities by making them more expensive in other currencies.
Colin Hamilton, commodities analyst at BMO Capital Markets, said that considering the headwinds, “the gold price is holding up pretty well”.
“For gold as a whole, we are still trading reasonably above the marginal cost of production,” he added.
Gold is traditionally viewed as a hedge against long-term inflation but that does not always hold true in the short term, and has not been the case this year.
“What it looks like at the moment, is that the gold price is tracking real yield on US government bonds,” said Alex Bedwany, mining analyst at Canaccord Genuity. “The indicators at the moment are not looking all that positive for gold.”
However others foresee that in coming years, in the event of an economic slowdown combined with high inflation, gold will be a safe store of value.
“The market is still looking to gold as a hedge against a policy mistake,” said Hansen, referring to a scenario where rate increases fail to get inflation under control. “Stagflation is a good friend of gold.”
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