Gold ‘Vulnerable’ as Rate Outlook Drives Price to Seven-Week Low

London (May 25)  Gold dropped to the lowest level in seven weeks as home sales in the U.S. rose, adding to speculation the economy can withstand higher interest rates and the Federal Reserve may tighten policy this summer.

Bullion for immediate delivery fell as much as 0.5 percent to $1,220.90 an ounce, the lowest since April 6, and traded at $1,221.02 by 10:29 a.m. in London, according to Bloomberg generic pricing. The metal has sunk 4.5 percent since May 17, the biggest six-day drop since November.

Gold is paring this year’s gains on prospects for a rate rise in June or July that boosted the dollar yesterday to a two-month high. Traders are now pricing in a better-than-even chance of higher borrowing costs by July, with Fed officials voicing support for a move should recent strength in the economy be sustained.

"Precious metals have dipped, mainly because of Fed expectations,” said Georgette Boele, an analyst in Amsterdam at ABN Amro Group NV. “At least we can say that some of the excessive long positions are cleaned now.”

Purchases of new homes in the U.S. surged in April to the highest since the start of 2008, Commerce Department figures showed Tuesday. Investors will scrutinize comments from Fed Chair Janet Yellen, set to speak at an event Friday, as well as a government jobs report June 3.

“Gold has been vulnerable since breaking below $1,250, and yesterday’s data just persuaded gold bulls to exit some of their positions,” said Bernard Aw, a strategist at IG Asia Pte.

For a QuickTake explainer on gold’s ups and downs, click here.

Gold sales by retailers in Hong Kong are forecast to have the worst downturn in at least 15 years as fewer mainland shoppers spend less money. Consumption may drop by as much as a quarter this year from 2015, according to the Chinese Gold & Silver Exchange Society in Hong Kong.

Venezuela cut its gold reserves by 16 percent in the first quarter, according to data from the International Monetary Fund, as the country’s economic crisis deepened and the government faced concerns that it may struggle to honor bond payments. The holdings, which stood at 8.77 million ounces at the end of 2015, were unchanged in January, dropped to 7.67 million ounces in February and contracted further to 7.4 million ounces in March, according to data on the IMF’s website.

In ETFs and other metals:

•Holdings in gold-backed exchange-traded funds fell 0.2 percent to 1,844 metric tons as of Tuesday, dropping from the highest level since November 2013, data compiled by Bloomberg show.

•Silver climbed 0.2 percent to $16.254 an ounce, according to Bloomberg generic pricing.

•Platinum was little changed at $998.80 an ounce.

•Palladium added 0.1 percent to $533.37 an ounce.

Source: Bloomberg