Gold Price Loses Some Luster as Fed Decision Looms

Hong Kong (Aug 31)  Gold's run-up during a period of significant global market turbulence in August appears to have fizzled out, with investors refocusing on the chances of a U.S. interest-rate in coming months.

The yellow metal had been one of the few bright spots among commodities, which have been hit hard by concerns about the health of the Chinese economy. While prices of base metals such as copper and aluminum, as well as crude oil, have been hovering close to six-year lows recently, gold hit a six-week high on Aug. 24 at $1,170.13 a troy ounce.

Gold's mini rally was driven in part by investors turning to the metal in its traditional role as a haven amid market volatility.

The market's gyrations also spurred some investors to believe the Federal Reserve would hold off on raising interest rates in the autumn months. A rate rise would likely lead to a strengthening of the U.S. dollar, hitting gold prices. Like other commodities, gold tends to fall when the dollar appreciates because it becomes more expensive for foreign buyers.

Also, gold, which doesn't pay interest, typically struggles to compete with assets such as bonds when rates do rise.

However, gold has slipped by 3.2% in the past week, as investors again recalibrate their U.S. rate expectations. On Monday, the precious metal fell to $1,132.64 during Asian trading hours.

"There is a good probability that gold may resume its fall this week," said Howie Lee, Singapore-based analyst with Phillip Futures.

Fed policy makers speaking in Jackson Hole, Wyo., over the weekend gave the impression the central bank would stick to its plan to raise rates before the end of the year despite the recent pronounced swings in global markets.

Another indication of gold losing its luster came last week when the metal failed to push above $1,150 despite some dollar weakness, says Gnanasekar Thiagarajan, director of Commtrendz Risk Management. He said the market would be keenly watching U.S. nonfarm payrolls data for August set to be issued Friday, with a positive report likely to bolster the chances of a Fed rate increase as soon as September.

On a brighter note, few investors now expect gold prices to soon fall below $1,000 a troy ounce--a distinct possibility when the metal hit a five-year low of $1,073.50 on July 20.

Physical demand for gold has firmed up since late July with retail investors in the key Indian and Chinese markets increasing their buying. The two countries account for about half of the world's retail demand for the commodity.

"Both gold investments and jewelry buying is seeing some recovery from a low base," said Jammy Chan, head of Greater China for Gold Bullion International, a trading platform that deals mostly with institutional clients.