Gold Tumbles amid Revived Rate Hike Hopes

The precious metal fell to a three-week trough on Wednesday, extending overnight losses in North American trade as possibilities for the Federal Reserve to raise interest rates in latter 2016 were rekindled.  Contributing to the gold slump are also the positive US economic outlook and US stock futures gains brought by upbeat earnings results.

These renewed expectations and optimistic economic picture boosted the greenback and thus, dragged down gold prices.

Bill O’Neill, a broker at LOGIC Advisors, said that: “Gold had everything going for it. Now we’re in a period where things are a lot calmer… The perfect playing field that existed for gold is not in play for the short term.”

On the Comex division of the New York Mercantile Exchange (NYMEX), gold sank 1.2% to a low of $1,316.00 a troy ounce, a level last touched in June 30 during the period Britain voted to leave the European Union. It last traded at $1,318.70 by 12:38 GMT, down 1.02%.

Nonetheless, the yellow metal remained supported amid talks that European and Asian central banks will ramp up monetary stimulus in the coming months to counter the negative economic shock by the British referendum last June 23.

Expectations for monetary stimulus tend to boost gold as the bullion is considered a safe-haven asset and inflation hedge.

Gold is almost up 25% for the year to date, as boosted by global growth woes and market participants withdrawing hopes for the next US rate increase by the Fed.

Elsewhere on the Comex, silver futures for September delivery dropped 42.5 cents or 2.12% to trade at $19.58 a troy ounce during morning hours in New York. Meanwhile, copper futures slumped 2.9 cents or 1.28% to trade $2.234 a pound.

Renewed Rate Hike Bets

Recent economic reports in the US led to suggest that economic growth was back on track in the second quarter. These reports included the positive numbers for June housing data, retail sales, ISM manufacturing and labor market.

The upbeat data could prompt the Fed to push rates higher later this year. However, it will depend on the policymakers’ evaluation on the Brexit impact on the US economy.

“The economic data in the US is supporting the argument that another rate hike could be a possibility by the end of this year and this is fueling the dollar rally,” cited Naeem Aslam, chief market analyst with Think Forex UK Ltd.

According to a The Wall Street Journal report yesterday, Fed officials are looking towards a rate hike before the year ends, as early as September, possibly.

At present, interest rate futures are pricing in a 47% chance of a rate increase by December, compared with last week’s 20% lower, and higher from 9% at the start of July.

US stocks have also soared to record highs recently. The Dow Jones Industrial Average peaked for the ninth day on Wednesday morning, after ending at a record.

The US dollar peaked at a new four-month high early on Wednesday, supported by Fed rate expectations. The US dollar index was up 0.15% at 97.22, higher from 96.00 levels the prior week and the strongest since March 10.

A stronger dollar dampens gold’s role as an alternative asset and makes dollar-branded commodities more costly for holders of other currencies.

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