Gold showed the strongest drop in nearly three years on Tuesday

05 Oct 2016

The gold prices showed the strongest drop in nearly three years on Tuesday, on a stronger US dollar and increased expectations of a Federal Reserve rate rise by year end, prompted investors to sell this precious metal. December gold futures at СОМЕХ closed down by 3.3% at 1,266.3 dollars per troy ounce. This is the lowest closing level since June 23. The cost of October silver contract, which is generally more volatile than gold, fell by 5.7% to 17.71 dollars per troy ounce. This is the strongest drop since January 2015. Traders turned to these two precious metals this year leading by a steady US dollar and the Fed, which turned out to be less inclined to raise interest rates earlier than investors expected. Recent signs showing the US economy to be strong enough for the Central Bank to raise interest rates by the end of the year, prompted some investors to lock in profits. The gold price has increased by nearly 19.46%, and the silver price has increased by 28.6% this year. “The market is coming to terms with what may be a new burst of dollar strength and a U.S. economy that is strong enough to bear an interest-rate increase,” said Ira Epstein, a strategist at the Linn Group. “This is where you step away from gold.” A drop in the British pound to a multidecade low helped boost the US dollar. The Wall Street Journal Dollar Index was recently up 0.6% at 87.06. A strong dollar tends to weigh on gold, which is priced in the U.S. currency and becomes more expensive to overseas buyers when the dollar appreciates. The U.S. currency was also firmer following a rebound in U.S. manufacturing data published shortly before. In addition, Fed President Loretta Mester reiterated her call for higher U.S. interest rates. Fed-funds futures, used to bet on central-bank policy, showed Tuesday that investors assigned a 63% likelihood to a rate increase in December, up from 61.6% the previous day, according to CME data. Expectations of higher rates often pressure gold. Gold does not bring interest income, so the metal is usually difficult to compete with other assets in a period of rising interest rates. Investors are also looking ahead to September nonfarm payrolls figures from the U.S. on Friday. A strong number could bolster the case for a rate increase in December and dent gold further, analysts said. “I think any strength of the U.S. economy is going to be negative for gold,” said John Davies, a global industry strategist at BMI Research. Not everyone is convinced that gold is headed lower. Peter Hug, global director of trading at Kitco Metals, said many of the factors that drove gold higher this year, including negative interest rates in Europe and Japan, will likely remain in place. At the same time, it is too early to tell whether the U.S. economy will stay strong through December, he said.

Source: Economical Information Agency «PRIME»