Gold price halts long fall after Fed rate hike
Tokyo-Japan (Dec 26) The gold market's two-year slide on speculation of a U.S. interest rate hike has stopped thanks to short covering in the futures market and buying of the metal as a safe asset after the Federal Reserve finally raised rates last week.
New York gold futures are around $1,075 per troy ounce. U.S. and European funds bought when the market hit bottom Dec. 17, the day after the Fed hiked rates. That day, the price of gold in Shanghai shot up to $1,070, compared with $1,050 in New York. The expansion of the gold premium in Shanghai from the year-to-date average of $3.50 signaled that the metal has stopped declining.
On Dec. 18, physically backed gold exchange-traded funds were bought. The total gold in trust for the popular SPDR Gold Shares grew 19 tons in a day -- the heaviest trading in five years -- to 649 tons.
Since surfacing two years ago, talk of a rate hike had continued to depress the price of gold, which provides no yield. The dollar appreciated during that time, with a Nikkei index showing the greenback's effective strength against other key currencies rising from around 102 to 127. Investment funds converted their gold holdings to dollars. Gold prices fell from $1,390 in March 2014 to the recent low of $1,050.
But gold now is being bought as a safe asset as investors avoid risks due to falling crude oil prices, market analyst Itsuo Toshima said. Anticipating that the Fed's additional rate hikes will be gradual next year, funds are flocking to gold as a haven.
The futures market had propelled the downswing in gold prices. Yet demand for gold has grown in the spot market in the second half of this year. India's gold consumption in the July-September period spiked about 80% on the quarter to 211 tons, partly due to expectations that the rupee will remain weak. And in China, where stock prices and the yuan have been declining, more investors are turning to gold as a haven.
Investors also note the decoupling of the gold and crude oil markets. When North Sea Brent crude hit its lowest price since July 2004 on Monday, gold recovered to $1,080 for the first time in about two weeks. Until recently, falling oil prices had been a factor in the gold market's decline.
In New York, short interest for gold ballooned to near-record levels just before the Fed rate hike, and these positions need to be covered eventually. "Sporadic short covering will gradually push up the gold market," predicted Koichiro Kamei, a financial and precious metals analyst.
But with the strengthening dollar seen keeping a lid on gold prices, most analysts expect the metal to advance only to around $1,200 in 2016.
Source: AsiaNikkei
