Gold price drops on dollar after first Fed rate rise in almost a decade
London (Dec 17) Gold fell on Thursday, as the dollar surged after the Federal Reserve increased U.S. interest rates for the first time in nearly a decade and hinted at more increases in 2016.
The U.S. central bank raised the range of its benchmark interest rate by a quarter of a percentage point on Wednesday.
The move sent the dollar up one percent to a two-week high against a basket of leading currencies, while spot gold dipped 0.7 percent to $1,066 an ounce by 1056 GMT, just $23 above a near-six-year low hit earlier this month.
A stronger U.S. currency makes gold more expensive for foreign holders.
"The hints of further rate hikes moved the dollar because the market had priced in 2-3 more rate hikes in 2016," Citi strategist David Wilson said.
"We are forecasting weaker gold prices in 2016, pushing down below $1,000 in the second half of next year."
Gold has slumped nearly 10 percent this year so far, largely on uncertainty around the timing of the rise and on fears that higher rates would hit demand for the non-interest-paying metal.
The metal had rallied before the Fed decision on Wednesday and ended the day up 1.2 percent, before retreating on Thursday.
Other precious metals also took a hit from a stronger dollar. Palladium fell nearly 3 percent to a session low of $552.22 an ounce, while silver was down 0.6 percent at $14.08 and platinum dropped 1.3 percent to $861.55.
Further trouble for gold could come from continued weakness in other commodities, notably oil, which fell 5 percent on Wednesday on supply worries and continued to ease on Thursday, mostly on dollar strength.
Gold is usually seen as an hedge against oil-led inflation and a lack of inflationary concerns removes another reason for investors to gain exposures to the metal.
"Most people have been reducing their exposure to gold in their portfolios and I can't see any reason why in a low to no-inflation environment and higher interest rate environment you would choose to significantly add to your gold holdings," Citi's Wilson said.
With the much anticipated first rate hike out of the way, the focus now shifts to the pace of future rate increases.
The rate forecasts, or dot points, from Fed members were a little higher than many expected with 100 basis points of hikes penciled in for next year and a terminal rate of 3.5 percent.
"Gold has been extraordinarily sensitive to perceived changes in monetary policy for many months," HSBC said in a note. "The rate rise may finally clear the deck and remove rate-related uncertainty from the bullion market."
Source: Reuters
