Third act for the gold price

On Wednesday on the Comex market in New York, gold futures with February delivery dates fell sharply hitting a fresh near-six year low after US Federal Reserve Chair Janet Yellen made her strongest statement yet for a rate hike in December.

Hitting a low of $1,049.60, down more than 1% in midday trade gold is down some $120 an ounce or more than 10% from where it was trading just before the Federal Reserve’s interest rate announcement in October which opened the door for a rate rise – which would be the first in nine years – when the bank next meets in two weeks time.

Gold is now trading at its lowest since February 2010 and November was the worst month for gold since mid-2013, a year during which the metal fell 28% in value.

In a speech to the Economic Club of Washington, Yellen laid the groundwork for interest rate rise at the central bank’s meeting on December 15 and 16 saying the US economy has “recovered substantially” from the 2008–2009 global financial crisis and is now primed for further growth and firmer inflation.

A hike in official interest rates would testify to the progress the US has made in shrugging off the fallout of the crash. Yellen also warned that there were risks in waiting too long to begin to normalizing monetary policy which have kept rates near zero since December 2008. A December  increase would be the first time rates have been lifted since mid-2006.

Higher interest rates boost the value of the dollar and makes gold less attractive as an investment because the metal is not yield-producing and on Tuesday the US dollar index scaled 100 against the currencies of the country’s major trading partners for the first time since July.

The greenback has strengthened 13.5% 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.

“We’re seeing the end of the second act of a three-part drama for gold,” Macquarie analyst Matthew Turner told Reuters following Yellen’s speech:

“The first part was post-financial crisis, when the Fed was easing and gold prices were going up. The second part has been since 2013, when the Fed has been moving towards its first tightening.”

“Now we have to see what happens in part three. There doesn’t seem to be any reason to see a big gold bounce until the Fed actually raises rates.”

The growing likelihood of a rate hike have prompted large futures speculators such as hedge funds to dramatically raise bearish bets on the metal.

So called “managed money” investors  have dumped nearly 140,000 lots or the equivalent of just under 400 tonnes of gold on New York futures markets in the space of just four weeks. That pushed overall positioning into the largest net short position – bets that gold will be cheaper in future – since government began tracking the data in 2006.


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