Gold Rush Halted by Fed Rate Blush

Gold has seen a significant pick up since Britain voted to leave the European Union, as most predicted it would.

Its designation as a haven meant the instability provoked by the election encouraged a flood of demand for it, but now its price has been negatively affected by another factor.

Read on for more.

Blue Monday for Gold

On Monday gold futures finished lower, a move which extended and amplified losses from its previous trading session.

This is mainly due to an increased inkling that the Federal Reserve will go ahead and raise interest rates again later this year.

The chances of this were cut dramatically several times this year due to Brexit, weak jobs reports in the US economy, and general instability.

However, the rhetoric of the Fed has led some to believe it is still in the cards.

The following falls were seen on Monday:

–    Gold for August deliveries on Comex GCQ6: drop of $3.90, settling at $1.319.50 per ounce (loss of 0.3%)

–    September Silver on SIU6: fell $0.042, settling at $19.647 (loss of 0.2%)

An unyielding dollar thanks to weakened Euro and Pound, as well as rising equities, are largely to blame for the dulling of gold’s haven appeal.

Bluer Wednesday?

Edward Meir is an independent commodity consultant for INTL FCStyone, and his daily note mentioned that the most important thing to look out for this week is the concluding policy statement of the Federal Reserve that took place on Wednesday.

It included a 2-hour meeting, and many believed it would shed light on the possibility of a rate hike this year.

According to Meir, investors are keeping an eye out for what the Fed says regarding Brexit.

The assessment and language used will be of great importance in estimating the next rate move or hike.

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The interest is such because:

–    High-interest rates lower opportunity costs of having gold

–    This is because the metal provides no yield

–    Investors thus go into riskier assets, such as stocks in commodities

See the graph below for the relationship between the two.

It’s from the 1970’s but is still relevant today.

June jobs joy, May mere memory

Another note, this time, posted by David Cheetham, who is a market analyst at XTB, explained why rates are back on the menu.

• Strong June employment report using payroll data
• Fast manufacturing growth
• Positive inflation data indicating economy strength
• Retail sales and industrial output indicate strong second quarter growth

All this was in stark contrast to dismal data that surfaced in May.

This, combined with the uncertainty around Brexit, meant many saw the situation as too fragile for the Fed to raise rates again.

However, with the new positive economic data for June and the election of a moderate, Remain-supporting Prime Minister to carry out Brexit negotiations, the tables have turned.

The developments have, in Cheetham’s words, made the case for tighter monetary policy for the short-term future.

As opposed to very low rates and cheap money.

Dollar sees a little drop, but still, stands firm

Although we mentioned that the dollar was still high, it was trading slightly lower on Monday, at least in comparison to the five-week consecutive gain it has been seeing.

It was trading at 0.15% less against major rivals (yen, pound, euro).

A dollar that is too strong makes U.S. goods less competitive.

There was also a small decline in the American stock market, though this did not provide support to gold prices as it tends to do.

The Dow Jones average was down 0.42% after its record high last week which had hurt the haven appeal of Gold (gold is a refuge as long as stocks are performing badly).

Metals still prove their metal

Physical demand is still the main driver of gold prices.

When the demand galls, so will the price, and this will be roughly in line with the rise of the U.S. dollar.

A recession could be looming for the UK, according to some economists.

With the effect this would have on the banking crisis in Europe which is already looming in Italy, there will still be plenty of reasons to buy or retain holdings of precious metals, gold, and silver.

Goldforecast.com recently published a note saying they could not find any reason at the moment to sell either commodity.

The performance of other metals was a mixed bag:

–    October Platinum (PLV6): up 0.61%, finishing at $1,088.40 per ounce

–    September Palladium (PAU6): up 0.11%, finishing at $688.75 per ounce

–    September Copper (HGU6): down 0.25%, finishing at $2.217 per pound