Chart: Which countries are falling behind in gold mine production
India tops the global ranking with demand nearly 50 times that of its mined supply.
On Friday the price of gold fell again, reaching a fresh 2014 low following three weeks of straight selling on the back of a strong dollar and expectations of a rise in US interest rates.
On the Comex division of the New York Mercantile Exchange in afternoon Friday trade gold for December delivery exchanged hands at $1,216 an ounce, a nearly 1% retreat from yesterday’s close.
After closing 2013 at $1,205 the price of gold jumped out of the starting gate, rising consistently to reach a high of $1,380 in March. But the subsequent retreat accelerated during the third quarter with a loss of 5.5% so far in September.
The chief reason for the recent weakness is the US Federal Reserve’s projection for where official interest rates will be heading.
After a closely watched meeting on Wednesday, the Fed said it is sticking to its timetable to keep interest rates near zero for a “considerable time”, but suggested that when rates eventually increase, they could rise more than the market is currently expecting.
The Fed now expects that short-term interest rates will be back to normal levels of around 3.75% by the end of 2017.
Higher interest rates and bond yields raise the opportunity costs of holding gold because the metal is not income producing and there is a strong negative correlation between gold and US bond yields.
Higher rates also entices investors to rotate into riskier assets like stocks which have continued to set records in 2014 and as evidenced by outflows from physical gold-backed ETFs.
On Friday benchmark treasurys jumped to the highest since June at 2.65% versus 3% at the start of the year, while adjusted for inflation yield in the US rose sharply to 0.61% versus 0.21% only one month ago and 0.75% at the start of the year.
Some modest signs of increased demand in the physical gold market after a dramatic slump in Asia earlier year, have emerged.
July, August and September are typically gold’s strongest performing months as buying from Asia increases – particularly due to upcoming festivals and wedding season in India.
A good gauge of demand is buyers’ willingness to pay a premium over the international price.
Asian buyers are famously cost-conscious. Premiums demanded in China topped out at $37 an ounce last year when gold was trading around today’s levels but fell into discount territory this year as the price of gold appreciated.
Spotting a bargain Chinese gold investors returned to market this week pushing premiums on the Shanghai Gold Exchange to around $4 – $5 above the London price.
The Indian government restrictions on imports saw premiums hit a highs of $170 above during the height of the festival season last year. Those premiums have evaporated but gold sellers in India can still demand a premium of $6 – $7.
Comments
Neil
“Higher rates also entices investors to rotate into riskier assets like stocks…”
I don’t think that’s right. While it is true that stocks have continued to set records, higher rates typically have the opposite effect on risk assets. In fact part of the purpose of the Fed pushing rates down for the last 5 years was to push investors into riskier assets.