Bullion falls ahead of likely rates hike by US Fed

GOLD dropped before the US Federal Reserve’s (Fed’s) meeting this week, as investors bet that policy makers would raise interest rates for the first time in almost a decade. Silver slipped to a six-year low.

There is a 74% probability that the Fed will raise borrowing costs at its two-day meeting that started yesterday, data compiled by Bloomberg show.

Higher rates tend to strengthen the dollar and cut the appeal of holding precious metals, which do not pay interest.

Bullion touched a five-year low earlier this month and investors are holding the least through gold-backed funds since 2009, while US government data show that money managers are wagering on further price declines.

Traders will be looking for an indication of the pace of interestrate increases, which Fed chairwoman Janet Yellen has said would be gradual, Commerzbank said in a note.

“It’s batten down the hatches ahead of Wednesday,” Ole Hansen, an analyst at Saxo Bank, said yesterday.

“The dollar is a tad stronger and this has removed some of the support from gold.”

Gold for immediate delivery lost 0.7% to $1,067.60/oz in London, according to Bloomberg generic pricing. The metal has dropped almost 10% this year, set for a third consecutive annual decline. A gauge of the dollar’s strength against 10 major currencies rose for the sixth time in seven days.

Holdings in gold-backed exchange-traded products fell 0.9 tonnes to 1,464.6 tonnes on Friday, the lowest since February 2009, data compiled by Bloomberg show. Hedge funds and other speculators are holding a net-short position of 14,089 contracts, according to the US Commodity Futures Trading Commission.

A weaker rand last week sent South African gold prices to a record. That benefits the country’s miners because they get their revenues from gold sales in the US currency, while their costs are in rand.

Silver dropped as much as 1.5% to $13.7063/oz in London, the lowest since 2009.

Platinum rose 0.5% and palladium gained 1.5%.

“US rates are going to move somewhat higher; the overall environment is still one of sound growth in the US.

“There is no inflation on the horizon at all, so from that prospective, you don’t need any gold,” Julius Baer analyst Carsten Menke told Reuters yesterday. “We see prices moving sideways between $1,000 and $1,100 next year.”

The dollar rose 0.2% against a basket of leading currencies, making dollar-denominated gold more expensive for foreign investors.

Stronger European equities, signalling increasing risk appetite, and a drop in oil prices to seven-year lows, also hurt bullion, which is seen as a safer asset and hedge against oil-led inflation.

Investors would soon be focusing on the pace of the Fed’s tightening cycle and how quickly it would try to normalise monetary policy, analysts said.