Gold price spooked by Fed rate fears heads for worst month since 2013

London (May 30)  Gold is on track for its biggest monthly decline since June 2013 after Federal Reserve Chair Janet Yellen said the improving US economy meant another interest-rate hike would probably be in order “in the coming months,” pushing the dollar to the highest since March.

Bullion for immediate delivery fell as much as 1% to $1,200.03 an ounce, the cheapest since Feb. 17, before trading at $1,203.22 by 11:51 a.m. in Singapore, according to Bloomberg generic pricing. Prices are down for the ninth day, the worst run in more than a year, and have lost 7% in May.

Yellen affirmed in comments Friday what a number of her officials said last week, that evidence of strength in the US economy meant tighter monetary policy could now be considered. Bets on a rate hike remain at 30% for June and the odds are even for an increase in July, with data showing US growth picked up more than was previously estimated in the first quarter. The dollar spot index climbed 0.2% on Monday.

“The key risk for me now is not whether they will hike once, but actually whether they will hike twice. As a house, we believe they will hike twice in September and December,” Wayne Gordon, executive director for commodities and forex at UBS Wealth Management, said in an interview in Singapore. “For me, it’s all about the data that’s coming in. Is that data as strong as what she needs it to be?”

Prices have plunged from the highest level in more than a year on May 2 as a growing chorus of Fed officials said a rate hike was possible by July. The decline has cut bullion’s advance in 2016 to 13% from more than 20% at the start of the month. Silver’s still up 15% this year even though it’s dropped to the lowest level since the middle of April.

Hedge funds took a breather from gold before Yellen’s comments on Friday. The net-long position in futures and options fell 26% to 169,491 contracts in the week ended May 24, according to US Commodity Futures Trading Commission data released three days later. Gold for immediate delivery lost 3.2% last week, the worst loss since November.

Higher borrowing costs damp the appeal of non-interest bearing assets like bullion and strengthen the dollar, making commodities more expensive in other currencies.

Holdings in gold-backed exchange-traded funds fell 2 metric tons to 1,842.9 tons on Friday. They had their first weekly decline in more than a month. Silver lost 1.7%, platinum slid 0.5% and palladium sank 0.5%.

Source: Bloomberg