Gold Price Lower as Market Digests China Rate Cut

August 26, 2015

New York (Aug 26)  Gold prices were lower on the London spot market Wednesday, confusing some market participants who believed that an interest-rate cut in China and current market volatility should be benefiting the yellow metal.

The falls pushed some analysts to conclude that gold’s recent rally was exaggerated by speculative investors covering short positions and that the metal is now set for further losses.

Spot gold was down 0.5% at $1,134.62 a troy ounce in midmorning European trade, after hitting a four-day low earlier in the session at $1,133 an ounce. The yellow metal declined for the second consecutive session, losing $20 in the process.

The People’s Bank of China cut interest rates by one-quarter of a percentage point on Tuesday, and reduced the bank reserve requirement ratio by half a percentage point. Lower lending costs in China should be gold friendly given they are aimed at aiding an economy that buys a lot of the metal and will likely push down interest rates, lessening the attraction of competing investments.

Gold’s lack of reaction puzzled many market participants as the yellow metal is traditionally considered a safe-haven asset, and it typically gains during times of heightened economic instability.

"The continued uncertainty on the financial markets and the dwindling rate hike expectation would generally suggest higher rather than lower gold prices,”  Commerzbank  said in a note.

UBS said that gold’s lack of reaction to the Chinese interest rate cut could have been because the move was expected and because the market is more focused on U.S. monetary policy.

The sharp rally in gold prices over the first three weeks of August is likely over, said analysts who are forecasting lower prices.

“The rally we saw over the last couple of weeks is, to my mind, over and done for the time being, and I would once again look to sell rallies in gold above $1,150 an ounce,”  David Govett, a precious metals analyst at Marex Spectron, said in a note.

Palladium prices, meanwhile, hovered just $4 above a second consecutive five-year low, as oversupply from South Africa, falling auto sales in China and frayed investor nerves prompted selloffs. Spot palladium is down 6% this week, though it edged up 0.1% to trade at $5,35.70 an ounce.

Among the other precious metals, spot silver was trading down 0.9% at $14.530 an ounce and spot platinum was trading up 0.8% at $978 an ounce.

Source: WSJ

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