Gold Down on Brighter US Data, Fed Rate-Increase Worries

San Francisco (Oct 30)  Gold prices fell Friday as investors continued to recalibrate their outlook on U.S. monetary policy in light of upbeat economic data and recent statements from the Federal Reserve.

The most actively traded contract, for December delivery, was recently down $4.70, or 0.4%, at $1,142.60 a troy ounce on the Comex division of the New York Mercantile Exchange.

Gold prices have retreated to a three-week low after Fed officials on Wednesday said they would use their December policy-setting meeting to decide whether the U.S. economy has improved enough to warrant higher interest rates. The communiqué was the clearest signal yet that the U.S. central bank might raise interest rates before the year is out.

“This market is a little spooked right now that the Fed will do something this year despite what (economic data) is out there right now,” said Bob Haberkorn, a senior commodities broker with RJO Futures in Chicago. “This whole downside move has been people taking money off the table.”

Gold doesn’t earn interest and would struggle to compete with yield-bearing assets like Treasury bonds once rates rise.

A stronger-than-expected reading of Chicago-area manufacturing activity also weighed on gold prices. The Chicago purchasing managers index reached 56.2 in October, compared with 48.7 in September. A reading above the 50 level points to expansion in factory activity, while a reading below that mark points to contraction.

The upbeat report spurred concerns about higher interest rates as Fed officials have repeatedly said that a shift to tighter monetary policy will hinge on brighter economic data.

But other economic indicators released Friday pointed to a more sluggish pace of growth. U.S. consumer spending rose 0.1% in September from a month earlier, less than the 0.2% growth economists predicted.

Meanwhile, the price index for personal consumption expenditures, the Federal Reserve’s favored inflation measure, fell 0.1% from August, the largest drop since January, when it fell 0.5%. Prices were up just 0.2% from September 2014. That figure missed the Fed’s 2% annual inflation target for the 41st month in a row.

“So far, it has been above all the low rate of inflation that has stopped the Fed from raising interest rates,” analysts at Commerzbank said in a note to clients.

Gold traders now train their sights on the U.S. employment report, due out next Friday. The closely watched indicator of U.S. labor-market health is a key input into the Fed’s decisions on monetary policy.

“If that number comes in better-than-expected there will be a sizable selloff in gold prices. but if the jobs data does miss the likelihood of a Fed rate increase this year is out the window,” Mr. Haberkorn said.

Source: WSJ