Gold price falls to within sight of 5-year low

On Wednesday, gold dropped to the lowest level since November last year after the US Federal Reserve said the world’s largest economy favours a rate rise this year.

Futures contracts in New York with August delivery dates were priced as low as $1,141.90 an ounce down more than $10 from yesterday’s close following comments by Fed chair Janet Yellen in testimony to US politicians.

That was the lowest since November 7 when gold briefly dipped to $1,135 an ounce before recovering to end that day at $1,173 an ounce. For a sustained period below $1,150 an ounce you have to go back to April 2010.

The Fed is on course to raise interest rates before the of the year – a decision that would show the country’s recovery from the “trauma” of the 2008-2009 financial crisis according to Yellen.

Yellen added that “favourable” trends in the economy is pushing the country towards maximum employment and that factors like the fall in the oil price that has kept inflation subdued have now worked their way through system.

Rising real interest rates raises the opportunity costs of holding gold because the metal provides no yield and therefore the price should decline.

Higher rates also boost the value of the dollar which usually move in the opposite direction of the gold price.

On Wednesday the USD jumped to levels last seen end-May against major currencies and the greenback is 20.7% stronger that a year ago.

Given that a rate rise in the US has been signposted for the better part of a year, the eventual hike would’ve been baked into the price long ago.

Gold’s current weakness probably has more to do with speculation on the futures market by so-called “managed money” than rate hike expectations.

Last week large gold futures investors such as hedge funds slashed overall bullish positions by a whopping 64%. The week before speculators cut long positions by more than half.

Bets that prices will rise only amounted to just 7,574 lots or 757,400 ounces in the week to July 7 according to the Commodity Futures Trading Commission’s weekly Commitment of Traders data.

The net long positioning is now the lowest since at least 2006 when gold was worth less than $600 an ounce.

Speculators’ short positions – bets that gold could be bought cheaper in the future – jumped to more than 10.8 million ounces (306 tonnes).

That’s a new record high for bearish bets placed on the New York gold futures market.

Source: Saxo Bank