Gold price inches lower amid expectation of US rate increase

London (Mar 20)   Gold prices edged lower on Tuesday as the dollar strengthened ahead of a meeting of the Federal Reserve at which the US central bank is expected to raise interest rates for the first time this year.

The looming Fed meeting has helped push gold down nearly 4% from a one-and-a-half-year high in January. Higher interest rates are negative for gold because they raise bond yields, reducing the appeal of non-yielding bullion, and tend to boost the dollar, making gold more expensive for users of other currencies.

Spot gold was down 0.3% at $1,312.97/oz at 10.02am GMT, while the dollar was slightly stronger against a basket of major currencies.

US gold futures for April delivery were 0.4% lower at $1,312.50/oz.

"The market has fully priced in a rate hike," Saxo Bank analyst Ole Hansen said.

Investors were instead looking ahead to guidance on the pace of future rate increases, with the Fed likely to take a cautious approach that would help lift gold prices, he said.

"With inflation not really picking up, rising geopolitical risk, trade wars looming and a flattening yield curve — this is not a backdrop that gives the Fed any urgent need to step up the speed of rate hikes."

Markets expect the Fed to raise rates three or four times this year. Gold prices have tended to fall ahead of rate increases in recent years and to rise after them. As gold has fallen, funds have scaled back bets on higher prices, with the net long position in Comex gold falling to about 136,000 contracts from almost 210,000 in late January.

That gave investors more space to buy gold, which could help prices recover, MKS trader Sam Laughlin said.

Holdings of gold in exchange-traded funds (ETFs) tracked by Reuters have meanwhile jumped to the highest since November 2016.

"That tells me longer-term investors have not given up their belief in higher prices," Saxo Bank’s Hansen said.

Technical support for gold was at its 100-day moving average of $1,305/oz.

In other precious metals, silver was down 0.1% at $16.28/oz, trading at three-month lows.

Platinum was down 0.5% at $948.30/oz after touching its lowest since January 3 on Monday. Palladium was 0.2% lower at $987.97/oz.

Reuters

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