Gold Prices Drop on Speculation Over Imminent Rate Increase

San Francisco (Sept 9)  Gold fell for the third day in a row on Friday, under pressure from a stronger US dollar and increasing concerns that the Federal Reserve may raise interest rates sooner than expected.

Gold for December delivery was recently down 0.4% at $1,336.00 a troy ounce on the Comex division of the New York Mercantile Exchange.

On Friday, Federal Reserve Bank of Boston President  Eric Rosengren spoke in favor of raising interest rates, sparking speculation that the central bank may raise rates later this month.

Disappointing U.S. economic data over the past week, including nonfarm payrolls and ISM nonmanufacturing reports, has buoyed gold prices and diminished expectations for a rate increase in September. However, the precious metal has also been susceptible to remarks from Fed officials, leading to sharp price swings in a thin market.

“This week almost feels like it’s still August. There’s no participation in the market and all of a sudden, September might be on the table again,” said Peter Hug, global trading director at Kitco Metals. “Its just keeping the market on edge and that’s why were getting this choppiness.”

The possibility of an interest-rate increase in September has made investors nervous, prompting some to scale back long positions in gold, Mr. Hug said.

Higher rates tend to hurt gold, which pays its holders nothing and struggles to compete with yield-bearing assets when borrowing costs rise.

Expectations for a rate increase in September have also lifted the dollar. The WSJ Dollar Index, which measures the dollar against 16 other currencies, was recently up 0.6% at 86.57. A stronger U.S. currency makes dollar-denominated gold becomes more expensive to foreign buyers.

Source: WSJ