Gold price falls through support

Image: Generation Grundeinkommen 2013

Despite a call by the IMF for the US to delay any interest rate hike, good jobs data released on Wednesday was enough to drop the gold price to levels last seen at the beginning of May.

Gold for delivery in August – the most active futures contract – fell to a low of $1,172.85 in midday trade before settling at $1,175.20 an ounce, down $9.70 or 0.8% from Wednesday’s closing price.

Gold has been hovering either side of $1,200 for the best part of three months but has not been able to break above $1,220 for any extended period. On the downside gold has bounced off support levels at $1,180 numerous times over the period but that price floor now appears to be gone.

Expectations of a rate hike in the US has been a major factor behind gold’s decline and data out of the US showing fewer people applying for unemployment benefits reinforced the view that the Federal Reserve will up rates sooner rather than later.

Official non-farm payroll data will be released on Friday which could strengthen the hawks on the Fed’s decision making committee who want to raise rates at the next meeting in June or latest September. It would be the first US rate hike in seven years.

The underlying reason for gold’s inverse relationship with interest rates is that as US yields rise the opportunity costs of holding gold increases because the metal is not income producing.

Gold’s weakness this week was also foreshadowed by a change in positioning by large investors like hedge funds – so-called “managed money” – on the gold futures market.

As gold retreated further from 3-month highs hit mid-May speculators last week slashed their bullish positions.

In the week to May 26 according to the Commodity Futures Trading Commission’s weekly Commitment of Traders data, hedge funds added to short positions – bets that prices are declining – and at the same time slashed their long positions.

On a net basis hedge funds are now long 7.3 million ounces down 16% from last week, nearly 10 million ounces below levels hit in January this year.

It’s still well off the 3.1 million ounces position held mid-March, however, when gold was hitting lows for 2015 of around $1,150.

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