Gold price crashes to six-year low

Ugly bear

On Wednesday gold seemed to take the announcement of the first US interest rate hike in nine years on the chin. Today, the metal is getting slammed.

Gold futures with February delivery dates dropped 2.5% or $27.20 from yesterday’s close to the lowest since October 2009 wiping out much of its gains during the period of ultra-loose monetary policy in the US and other markets during the global financial crisis.

In massive volumes traders on the Comex market in New York pushed the gold price down to $1,050.10 an ounce in early afternoon trade, not far off the $1,047 intra-day low hit in morning dealings.

The Federal Reserve’s 0.25% hike from  near zero where it’s been since December 2008 had been widely expected and the central bank also said given current economic conditions, interest interest rates are only likely to increase in a “gradual” way.

But that was not enough to convince large futures investors like hedge funds which have built up recording breaking bearish positions on futures markers over the last six weeks that gold has delinked from market rates.

Since the global financial crisis the relationship between interest rate expectations and the gold price has only become tighter with some analysts believing the metal can serve as an early warning system of both the direction and magnitude of the move in rates.

Higher interest rates boost the value of the dollar and makes gold less attractive as an investment because the metal is not yield-producing. US Treasury yields and the gold price have a strong negative correlation and a stronger dollar has an even closer inverse relationship to commodity prices in general.

Source: Capital Economics

Source: Capital Economics

The US dollar index surged 1% (a dramatic move for currency markets where fluctuations are usually counted in basis points) on Thursday to 99.30 against the currencies of the country’s major trading partners on Wednesday. The greenback has strengthened 11.7% 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.

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