Gold Price Hovers Near Five-Year Lows on Firmer Dollar, Prospect of U.S. Rate Rise

London (Nov 30)  A strong dollar and expectations of a U.S. interest rate increase kept gold prices hovering near five-year lows on Monday.

In London, spot gold was down $1,056.21 a troy ounce in midmorning European trade, having hit its lowest level since February 2010 in the previous session at $1,052.95 an ounce.

Gold prices fell to their lowest level in more than five years on Friday as a firmer dollar and interest rate-rise fears continued to pressure investor appetite for the precious metal.

“With a firm dollar and all-round weak commodity prices, the market had been in the doldrums,” said  David Govett, head of precious metals at Marex Spectron.

Commodities have been hit across the board, with only three of the 24 commodities tracked by the S&P GSCI Index in positive territory over November, for the first time since 1970, the farthest back the benchmark stretches. Year-to-date, the index is also on pace for its fifth worst year, with only 1998, 2001, 2008 and 2014 losing more.

Gold is down over 11% this year, so far.

Among its biggest recent problems has been the rise of the dollar. Gold is a dollar-denominated commodity and becomes more expensive for other currency-holders to buy when the greenback gains. The WSJ Dollar Index was recently up 0.07% at 90.88.

The dollar is gaining given that the market increasingly expects the U.S. Federal Reserve to raise the key interest rate in a meeting this month. That would be bearish for gold, which costs money to hold and so struggles to attract investors as yield-bearing instruments become more attractive.

Because the likelihood of a rate increase is based on the strength of economic data, market participants will be closely watching the U.S. nonfarm payrolls data for November, which will be released on Friday. Strong jobs growth would push up the likelihood of a Fed rate increase, as well as the strength of the dollar.

“We will remain under pressure until the (Federal Open Market Committee) meeting is out of the way,” said Mr. Govett.

As market players watch the Fed, a meeting by the European Central Bank on Thursday is unlikely to have an effect on gold prices, according to Germany’s  Commerzbank AG .

The ECB is likely to expand its bond purchasing efforts, known as quantitative easing, in the meeting, which would push bond yields down and increasing liquidity. This should normally be bullish for gold, Commerzbank said.

“The upcoming rate hike that the U.S. Federal Reserve is expected to implement is presumably keeping the gold price in check,” the bank said.

The other precious metals were mostly lower at the start of the week. Spot silver was up 0.3% at $14.120 an ounce, but spot platinum was down 0.7% at $828.80 an ounce and spot palladium was down 0.1% at $547.40 an ounce.

Source: WSJ