Gold Price Drops on Strong U.S Economic Data

London (July 18)  Gold prices fell to a two-week low on Monday amid profit-taking and the release of strong U.S. economic data. Gold for August delivery fell 0.81% to $1,326.96 a troy ounce in midmorning London trade, the lowest price since June 30.

That drop is likely to continue as investors take profits, after the speculative net-long position on gold reached a record high in recent weeks, said  William Adams, director of research at FastMarkets.

“I think there is risk of more profit-taking,” Mr. Adams said.

U.S. Commodity Futures Trading Commission data released Friday showed that net-long positions in gold fell by 5% to 259,100 contracts in the week to 12 July. This is the first reduction since the end of May, analysts at  Commerzbank AG  said in a note. The pullback suggests investors are seeking to take profits now in case the gold price falls further.

A rise in global stock markets on Monday, despite the uncertainty caused by a failed military coup in Turkey, could also prove bearish for the precious metal in the short term. A rise in global stocks is bearish for gold, as the safe haven metal is preferred by investors during times of market turbulence.

“Stocks also appear to be becoming increasingly popular as an alternative investment opportunity again, as can be seen from the record highs achieved by the U.S. markets,” Commerzbank said.

The strong performance by the U.S. economy recently has also increased the likelihood of the Federal Reserve introducing a rate increase this year. A higher interest rate would weigh on gold prices, since the metal doesn't bear interest, and so has difficulty competing with yield-bearing assets when borrowing costs rise.

Attention will turn to Europe this week, with the European Central Bank holding its first policy meeting this Thursday since the U.K. voted to leave the European Union. The ECB is expected to keep interest rates low, which could keep sentiment for gold bullish overall.

Source: WSJ