Fed inflicts more damage on gold price

Fed chair Janet Yellen

On Wednesday on the Comex market in New York, gold futures with December delivery dates fell for a sixth session in a row giving to trade at a seven-week low.

Exchanging hands for $1,107.00 an ounce in late afternoon trade, gold is down more than $75 an ounce or 6% from where it trading just before the Federal Reserve’s interest rate announcement last week. Gold fell to a near five-year low of $1,085 in early August.

Fed Chair Janet Yellen testified before the House Financial Services Committee on Wednesday and echoed the language of the FOMC minutes which opened the door for a rate rise when the bank next meets in December. Yellen gave a positive reading of the employment and housing markets in the US further boosting rate hawks.

Higher interest rates boost the value of the dollar and makes gold less attractive as an investment because the metal is not yield-producing.

The US dollar index jumped to a three month high of 98.05 against the currencies of the country’s major trading partners on Wednesday. The greenback has strengthened 11.3% over the past year and the last time the currencies topped 100 for a sustained period was in the early 2000s.

Today’s level compares to a record low of 71.6 in April of 2008 and a record high of 164.72 in February 1985 when the price of gold bottomed at $284.25 an ounce.

Friday’s employment figures in the US will give the clearest indication whether the Fed lift rates from near zero where they have been since December 2008.

And as this graph from Dutch bank ABN Amro illustrates, the reaction of the gold price could be dramatic.

Fed inflicts more damage on gold price

Gold is also looking vulnerable on the technical side. Large futures speculators or “managed money” investors such as hedge funds have built up huge long positions – contracts that place bets gold will be more expensive in future – since September while cutting shorts at the same time.

Should a positive jobs number increase the likelihood of a rates rise – something gold bulls haven’t had to contend with since June 2006 – hedge funds have 15.2 million ounces or 430 tonnes worth of gold looking for buyers according to the CFTC’s weekly Commitment of Traders data.

At the same time short positions have also been cut dramatically to just 3.1 million ounces creating a huge overhang in the market.

Current positioning also constitutes a huge reversal from July and early August when hedge funds entered net short positions for the first time since at least 2006, when the Commodity Futures Trading Commission first began tracking the data.

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