After a strong run-up ahead of a crucial US Federal Reserve decision on interest rates on Wednesday, the gold price came crashing down again after a hawkish statement by the central bank.
On the Comex market in New York, gold futures with December delivery dates fell more than $30 an ounce from where it trading just before the announcement. In afternoon trade the sell-off accelerated with gold last exchanging hands at $1,152.30 from $1,183.50 ahead of the Fed statement.
While the Fed decided to keep interest rates unchanged it hinted at a rate rise at its next meeting in December against market expectations of a first move only in March next year. 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 Fed voted 9 to 1 to leave rates in a range of zero and 0.25% where they have been since December 2008. Interest rates in the world’s largest economy has not been raised in more than nine years.
Gold hit its highest level since June 22 a fortnight ago, amid fresh indications that a limp US economy may push a rate hike further into the future, but that narrative now seems to be in trouble.
Hedge funds reduced bullish bets to more than five year lows ahead of the September Fed decision, but since then large futures speculators – referred to as “managed money” – have played catch-up with the turnaround in sentiment towards gold and the fading expectations of a rate hike in 2015.
According to the CFTC’s weekly Commitment of Traders data for the week to October 20 hedge funds added more than 47% to their long positions – bets that gold will be more expensive in the future – from the week before. Last week’s rise was 66% and hedge funds have now added net long positions for five straight weeks.
Net longs now stand at 12.2 million ounces (345 tonnes), the highest since February. At the start of the year bullish positions topped out at 16.7 million ounces when gold briefly traded north of $1,300.
Speculators also made deep cuts to short positions ahead of last week’s rally – bets that gold could be bought cheaper in the future – reducing overall positions more than 20% to 3.7 million ounces, down from record highs above 11 million ounces set in July.
In late July and early August, 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.