Gold price losing value on strong US dollar
Seoul-South Korea (Dec 28) Gold prices have been falling to record lows this month, especially after the U.S. Federal Reserve decided to raise its key interest rate in mid-December.
Gold futures for February delivery slightly rebounded on Tuesday, closing up 0.5 percent at $1,138.80 an ounce on the New York Mercantile Exchange, after suffering losses for seventh straight weeks, the longest decline in 12 years. So far, gold fell around 4 percent this month.
The record loss comes as the value of the U.S. dollar has been gaining on rosy economic outlook for the world's largest economy.
The dollar index against a basket of major currencies including the euro and Japanese yen maintained its 14-year high of above 103 last week.
With the dollar gaining momentum, analysts say that the bullion prices are likely to further head south as long as the U.S. Fed remains hawkish over its monetary policy.
"There are several factors that can burden gold prices, and the No. 1 variable is the rising market interest rate on the back of the Fed's further hike expectations," said Kim Hun-gil, analyst at Hana Financial Investment. He expects gold prices could drop as low as $1,100.
As the new Donald Trump administration is expected to issue bonds for its fiscal stimulus, which would fuel bond yields, as its spending grows, the analyst forecast that yields on 10-year Treasuries would hit beyond 3 percent early next year. Bond prices move inversely to yields.
The Fed's dot plot indicates that the central bank could further raise its short-term rate three times next year. Analysts predict that its first rate hike could happen in March next year.
Given that gold is priced in dollars, a stronger dollar would raise the prices of the bullion, making it expensive for investors or economies with other currencies to purchase. Thus, a strong dollar would lower demand for gold.
Also, an increase in the market interest rate would drive investors' attention away from gold to higher-yielding assets such as stocks, analysts say.
As the metal will face some corrections ahead while the Fed signals rate hikes, analysts say the market is likely to see gold prices stabilize in the latter half of next year.
Source: KoreanTimes
