Gold price holds 4-month low on likelihood of US interest rate hike

London (July 16)  Gold held its lowest level in four months Thursday morning, following a drop of $10/oz late Wednesday after US Federal Reserve Chair Janet Yellen reiterated that a US interest rate increase is likely this year, boosting the dollar at bullion's expense.

 The LBMA Gold Price settled at $1,145.1/oz Thursday morning, down $9.65/oz on the day before.

 Positive economic data from the US on Wednesday, including better than expected inflation and manufacturing data, helped push the dollar higher on expectations the US Fed would hike interest rates.

 A US rate hike boosts the dollar and puts dollar-priced assets such as gold out of favor, as they become more expensive for buyers holding other currencies.

 Gold has been sliding for four weeks, down 4.8% from $1,203.4/oz on June 19, as the Greek deal, reduced geopolitical Middle East tensions and the sluggish euro weighed on the market.

 "The lack of potential buyers -- rather than an overwhelmingly bearish climate -- appears to be at the heart of gold weakness," said HSBC analyst James Steel in a note Wednesday.

 "Until physical [emerging market] buyers become interested in gold, the market may move sideways to lower," he added.

 Gold demand in India, the world's second largest consumer of the precious metal, has been weak throughout June and July, trading at discounts as low as $8/oz to the international price, according to Platts data.

 "The [Indian] market has not been at a premium since April and until it moves higher and turns positive a gold rally will be hard to sustain," Steel said in an email to Platts.

 Yet sources in India have pointed to an improvement this week, with the discount heard at $4-5/oz and as low as $1.50-2.50/oz Thursday, supported by the drop in the international price.

 A decent monsoon and better prospects for a good harvest, important for a rural sector that drives Indian buying, have also helped support the local markets recently.

 "We expect stronger prices later in Q3 and Q4 however as EM demand recovers. Already, demand in China has picked up although we did see margin related selling with the equity drop off in recent weeks," Steel said.

Source: Platts