Gold up after Federal Reserve rate outlook spurs biggest drop this month

Gold is trading nearly 5% higher than it was before the Fed held its September meeting.

In India, on the Multi Commodity Exchange, copper on the futures exchange was trading 0.7 per cent down at Rs 339 a kg, aluminium 0.4 per cent down at Rs 94.15 a kg, gold was down 0.9 per cent to Rs 26,823 for 10g and silver 1.6 per cent lower at Rs 37,226 a kg. Although the Fed did as expected the statement language changed significantly indicating that a rate increase in December was also a certainty. Many investors were caught on the wrong side of a few sizeable trades. It was an incredible lesson in fundamental analysis as the about turn on the charts was all in the Fed words and not actions.

“Some of these net long positions are now likely to have been covered”, Commerzbank believes, with gold prices swiftly falling from above $1180 after media reports said Wednesday’s Fed statement put a December rate-hike “firmly on the agenda”. The statement prompted the dollar to strengthen and yields to rise on the 10-year Treasury, which both in turn weighed on safe-haven precious metal investments like gold.

Hopes that interest rates might not go up until the first quarter of next year or even later had helped gold climb above US$1.190 at one point, but today it was US$5 lower at US$1,150.

Meanwhile, global equity markets slipped, halting after a four-week rally ahead of the policy-setting meeting by the FOMC (Federal Open Market Committee).

Hedge funds built up net long positions – bets that gold will be more expensive in future – for five weeks in a row, tripling holdings over the past month. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. “Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable”.