August 22, 2014 4:20 pm

Gold drops on rate rise concerns

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Gold was headed for its biggest weekly drop since May on Friday with strong US economic data and rising equity prices hurting investor sentiment.

Minutes published this week from the Federal Reserve meeting in July showed that policy makers had debated whether they should raise interest rates earlier due to a recovery in the job market. Meanwhile the S&P 500 has advanced further into record territory.

In response, the yellow metal – considered a haven asset in times of economic turmoil – sank as low as $1,273 a troy ounce on Thursday, a two-month low. On Friday gold was down 0.2 per cent at $1,275 a troy ounce, and headed for a weekly loss of 2.2 per cent.

Higher interest rates are seen as negative for assets like bullion, which do not bear interest. The continued strength of the US dollar has also worked against the gold price.

Joni Teves, precious metals analyst at UBS, said this week’s slide in the gold price was mainly a reaction to the Fed minutes.

“Once the price went below $1,280, you got a reaction from physical buyers that cushioned the market,” Ms Teves said.

Gold’s 12-year bull run ended in 2013, when the price fell 28 per cent as western investors dumped gold-backed exchange traded funds. The sell-off continued into 2014, albeit at a much reduced level, and since May ETF holdings have stabilised. For the year, the gold price is up 6 per cent.

While demand in the world’s top consumer markets, China and India, has been weaker this year than in 2013, the gold price dip comes at an “opportune time” for India, UBS said in a note on Friday. The festival and wedding season, when spending on gold increases, is about to begin there.

That may not be enough to lift the global price though. Indeed, UBS thinks the gold price is likely to fall further in the short term. Standard Bank agrees, noting this week that “price risk lies to the downside”.

Silver has also been under pressure. Since reaching $21.05 a troy ounce in early July, the metal has fallen 8 per cent, to $19.30 a troy ounce on Friday. Among the other precious metals, platinum and palladium, which have both benefited from supply disruptions this year, rose by 0.1 per cent and 0.4 per cent respectively on Friday to $1,412 and $877 a troy ounce.

Among the base metals, copper was on course to cap a strong week, climbing 0.9 per cent to $7,075 a tonne for three-month delivery on the London Metal Exchange. Aluminium also ended in positive territory, rising 0.3 per cent to $2,065 a tonne, while lead gained 0.4 per cent to $2,255 a tonne. The prices of nickel and tin dipped, while zinc dropped the most, falling 0.6 per cent to $2,347 a tonne.

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