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Gold Prices Weighed Down By Possible Rate Hike By US Fed

Precious Metal Investment Expert
June 16, 2015

Gold prices have extended last week’s gains, due to some short covering in the futures markets and some renewed safe-haven buying amid the collapse of the Greek talks with its European creditors.

Negotiation between Greece and its creditors collapsed after just 45 minutes of meeting on Sunday. It's reported the European Union officials blamed the failure on Greece, which failed to offer anything new for securing the EUR 7.2 billion funding.  

Greece's Prime Minister Alexis Tsipras urged the country's creditors to get "realistic" a day after weekend negotiations failed to bridge major differences, setting the stage for Eurozone finance ministers to make a final push to reach a deal to avert a default.

He said the Greek government would wait "patiently" until the country's creditors - the European Commission, the European Central Bank and the International Monetary Fund (IMF) - become "realistic."

The comments came ahead of yet another crucial meeting of Eurozone finance ministers on Thursday, where further talks on Greece's finances are to take place and just two weeks before an IMF debt repayment deadline and the expiry of the European part of the country's bailout.

Fears are mounting that Greece will soon run out of money, with no agreement yet on reforms that the country would have to implement in exchange for access to 7.2 billion euros (8.1 billion dollars) in remaining bailout funds.

Greece still owes the International Monetary Fund about $1.7 billion this month. Then, in July and August, the European Central Bank is due almost 6.8 billion euros ($7.6 billion).

Investors are worried about the worsening Greek debt crisis while many market participants believe that the metal could fall lower before the end of the year due to a possible Fed interest rate hike.

Frankly, I can’t see how it is possible for Greece to repay its debts, and I have long maintained that a Greek exit is imminent. However, it is possible for the financial leaders to continue to kick the can down the road and extend more time for Greece.

While traders watch the developments in Greece they remain fixated on whether the Fed will raise rates or not.

The U.S. central bank will begin its two-day meeting on Tuesday, with a statement to be released on Wednesday afternoon.

It is widely expected that the Fed will not change current monetary policies but will hint at a September rate hike. As the Fed remains data dependent, it is difficult to predict what their actions will be. Almost as soon as there is a release of some positive economic data, some bad news follows. 

Data on Friday showed U.S. producer prices in May recorded their biggest increase in more than 2-1/2 years, while U.S. consumer sentiment rose more than expected in June. However, only a day before, the International Monetary Fund (IMF) reported that it had slashed its growth outlook for the U.S.

The IMF now sees U.S. GDP at 2.5% for 2015, down from the 3.1% it was predicting as recently as April. But it didn’t stop there. It also advised the Federal Reserve to hold off on an already-long-overdue interest-rate increase until the first half of 2016, citing “pockets of vulnerabilities” in the U.S. including lagging wages and a still-struggling labour market.

It also warned that the dollar is “moderately overvalued” and that a further marked appreciation would be “harmful.”

The IMF said the Fed should keep its cheap money flowing even if there’s a risk of “slight over-inflation” relative to the central bank’s 2% inflation target.

If this slowdown in the U.S persists, the Fed would be under even greater pressure than before to boost growth via inflation-inducing monetary policies like zero interest rates. The only problem is: The Fed has had its key rate stuck at zero since 2008; it can’t go any lower. The only action it can take, is more quantitative easing (QE), or purchases of Treasury bonds and mortgage-backed securities.

Meanwhile, as the price of gold continues to languish near major lows and while traders remain bearish, it is interesting to note that based on past trends, the price of gold tends to drop to a seasonal low during June.

On average between 2001 and 2012 before the introduction of quantitative easing, causing serious market distortions, gold moved higher between mid-June and early October. 

In the unlikely event that the Fed raises rates in September, gold looks poised to continue higher over the long-term as investors will likely seek out its wealth preservation qualities as the U.S. Dollar continues to lose value in real terms.

The global economy is not strong, and in fact could not tolerate higher interest rates. The ongoing currency war will also serve to keep currency values down as economies fight to keep moving forward.

The continuing depreciation of the dollar and other fiat currencies has already been set in motion and the only one asset class can offer meaningful protection from this inevitable scenario is gold. It has stood the test of time as a reliable store of value not dependent on government promises or obligations.

Current gold prices offer investors the best time of the year to buy physical gold. Smart investors and speculators buy when prices are low and when sentiment is miserable.


Gold prices continue their lacklustre performance as prices remain stuck between $1180/oz. and $1220/oz. 

David Levenstein is a leading expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

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