Gold getting caned, investors dumping ETFs ahead of Fed rate hike meeting

Gold fell toward a three-month low on Tuesday as the dollar hit a seven-month peak on prospects the US Federal Reserve will raise interest rates in December, while silver and platinum extended losses to multi-week troughs.

The most actively traded contract, for December delivery, was recently up $1.60, or 0.2%, at $1.089.30 a troy ounce on the Comex division of the NY Mercantile Exchange.

“The price of gold over recent months seems tied to reaction over when the US Fed intends to hike interest rates”, said Luc Luyet of fund and asset manager Pictet. “Gold has made a bounce off $1,090 support which could prove to be consolidation ahead of a further slide below $1,080 on the back of a surging USA dollar and weakening euro, making the yellow metal even more expensive to those not using dollars”, writes Mike van Dulken, head of research at Accendo Markets.

An increase in the Fed’s interest rate drives investors away from gold and towards assets with a return, as the precious metal bears no interest. At the same time, the rate of unemployment fell 0.1% to reach 5.0% in October, or the lowest level since April 2008.

During her testimony in front of the House Financial Services Committee last week, Federal Reserve Chair Janet Yellen said the U.S. economy was “performing well”, while an increase in the target range for the federal funds rate in December was a “live possibility”, if macroeconomic conditions remained on track.

The dollar index fell 0.1 percent against a basket of leading currencies, after hitting a seven-month high in the previous session. He pegged the next support level for gold at around $1,074 and then at $1,050.

But Meir said the metal faces more weakness in the near term and “poor technicals and a buoyant dollar do not help gold’s upside case much either”. Low global interest rates will lead to higher prices.

He also suggested the Fed needs to be careful not to raise rates if it will just have to lower them again shortly afterward, a theme he has hit time and again as he as argued against the rate hike that the Fed is now considering.

Palladium was up 0.1 percent at $595.45 an ounce.

“Physical gold demand in China still appears to be robust and indeed to be picking up, given that the premiums on the Shanghai Gold Exchange have risen to $4-5 per ounce as compared to world market prices”, the broker added.