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Gold bugs look away.

The yellow metal is poised for its worst weekly performance since November 11 as the markets ramped up bets that the Federal Reserve could raise interest rates by more than the three times this year.

Spot gold was down 2.8 per cent for the week at $1,203 a troy ounce and set to notch its second consecutive weekly drop.

A string of upbeat economic data and hawkish remarks from Fed speakers has cemented expectations that the US central bank will add to its December rate rise when it meets next week.

Instead investors are now focused on the pace at which the Fed will raise rates for the next of the year with odds of four rate rises climbing above 25 per cent on Friday, according to Bloomberg calculations. At its December meeting, the Fed had signalled three rate rises this year.

Talk of higher rates has taken the steam out of a recent rally in the precious metal. Gold, which offers no yield, had been benefitting from the rising uncertainty around the outcomes of upcoming European elections.

Sentiment on gold miners, that had their best year in more than a decade in 2016, has also soured. The NYSE Arca gold miners index has declined 4.1 per cent over the week and is down for the fourth consecutive week.

The latest sell-off has helped trim golds gains for the year to just 2.5 per cent. However, if inflation continues to pick up, the precious metal, considered an inflation hedge, could see some support. Analysts at Bank of America said:

More recently, inflation forwards have fallen modestly as investors are starting to wonder whether even higher inflation is on the cards. After all, headline inflation has been trending higher for more than nine months now. This was originally helped by bottoming oil and commodity prices, which may start to run their course.

Yet, given economic slack has been declining and many of Trump’s economic policies are inflationary (e.g. protectionism), a return to disinflation is unlikely; indeed, upward pressure on general price levels may remain a feature through 2017. This suggests that a dip around the first Fed rate hike, which may take gold to $1,200/oz, would be a buying opportunity.

Copyright The Financial Times Limited 2017. All rights reserved.
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