Gold drops to three-week low as Fed points to possible June hike

New York (May 19)  Gold declined to a three-week low on concern that the Federal Reserve may raise interest rates as soon as June after the possibility was flagged in the minutes of its meeting last month.

Bullion for immediate delivery fell as much as 0.5% to $1 252.42 an ounce, the lowest level since April 28, and was at $1 255 at 2:39pm in Singapore, according to Bloomberg generic pricing. After the minutes were released on Wednesday, gold sank as much as 1.9%. The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, was steady after jumping 0.8% on Wednesday, the most since November 6.

Gold is retreating from a 15-month high as investors try to gauge the likelihood of higher US borrowing costs, which tend to hurt bullion demand while boosting the dollar. The April minutes indicated most policy makers said a hike would be appropriate in June should the US economy continue to improve.

Moody’s Investors Service lowered its growth forecast for the US economy this year to account for a weak first quarter, while anticipating underlying resilience through 2017. Odds for a rise next month have surged to 32%, from 4% on Monday, according to Fed funds futures compiled by Bloomberg.

Negative Reaction

“The market’s reaction was negative because the Fed is aiming to raise interest rates at some stage, probably at the next meeting or even July,” Tetsu Emori, president of Emori Capital Management, said by phone from Tokyo. “It’s pushing up the dollar, so commodities including gold should be pushed down. But I don’t think gold will go down further as $1 250 should be quite an important support and that should be held and physical interest should be coming in the market around there.”

Even if the Fed does increase rates in June, the dollar will peak and then start falling again against major currencies, which will be supportive to gold, said Emori, who’s bullish on bullion in the long-term.

Newcrest Mining, Australia’s biggest producer, fell 7.5%, the biggest decline since October. Zhaojin Mining Industry Co tumbled as much as 9.7% in Hong Kong. Holdings in gold-backed exchange-traded funds increased 2 metric tons to 1 827.3 tons as of Wednesday to the highest since December 2013, data compiled by Bloomberg show. They’ve jumped 25% this year.

In China, bullion of 99.99% purity dropped 1.3% to 264.34 yuan a gram ($1 256.67 an ounce) on the Shanghai Gold Exchange. Silver fell 1.3% to extend Wednesday’s 2% slump, platinum lost 0.5% and palladium was little changed.

Source: Mineweb