While platinum plunged, and silver and palladium also declined, gold has grabbed the headlines for its 5-year low.
Blame it on U.S. Federal Reserve chairman Janet Yellen’s decision to raise rates this year on the back of an improving American economy, boosting the dollar. This will be the first Fed hike in 8 years.
Receding fears concerning Greece also contributed.
China has ended years of speculation about its official reserves of gold by revealing over the weekend that they stood at 1,658 tonnes.
Victor Thianpiriya, commodity strategist at ANZ, was quoted in the press as saying that around 5 tonnes of gold was sold on the Shanghai Gold Exchange within the space of two minutes prior to 09:30am, in a market where the normal volume traded on a daily basis is about 25 tonnes. In the same vein, Business Insider stated that the price of gold got destroyed because five tonnes of bullion got dumped on the Chinese market.
Barnabas Gan, an economist at Singapore-based Oversea-Chinese Banking Corp., was quoted in Bloomberg as saying he is still bearish on gold. “For the year-end, I’m still looking at $1,050 an ounce. The bearish outlook is underpinned by the likelihood of the U.S. Fed rate hike.
Chirag Mehta, Senior Fund Manager - Alternative Investments, Quantum AMC, shares his views on the price of gold going ahead.
Gold markets will continue to remain fixated on the interest rate hike in the U.S. Not to rule out the probability of any further correction, prices should find some support from the cost of production dynamics and the ongoing theme of diversification of investments and reserves.
As we approach the rate increases in the U.S., it could be accompanied with further speculative selling on the prospects of further hikes and all talks of real rates moving higher. After the initial rate normalisation jitters, the environment will likely be far more positive for gold. It is thereafter markets would shift focus from timing the rate hike to the likely nature and extent of rate hikes.
The Fed may not want to run risk of a too divergent monetary policy than its global counterparts as that would lead to a significant further appreciation in the dollar. Even the current dollar strength seems to be hurting the U.S. economy rather than helping.
Also, the Fed has been openly saying that the Fed rate hike would be gradual, so it’s no point shooting in the dark and expecting an aggressive tightening cycle. We reiterate our view that as the market figures out that Fed will stay behind the curve and do only little and keep real rates negative for much longer, gold should start moving northwards.
