Gold Plunges on Possible Fed Rate Hike

Gold prices fell to its lowest in nearly two weeks due to strengthening dollar

g1Gold prices fell on Monday, August 22nd, 2016 as the dollar strengthened following hint from U.S. Federal Reserve officials of a possible U.S. rate hike in 2016. Spot gold fell 0.6% to $1,333.40 an ounce on August 22nd, 2016, after touching a low of $1,331.35, a level not seen since August 9th, 2016. U.S. gold dropped 0.6% to $1,337.90 an ounce. A stronger dollar makes gold purchases more expensive for holders of other currencies. Spot gold is expected to drop deeply to $1,320 per ounce in the near-term.

g2The Fed Vice Chairman Stanley Fischer said on August 21st, 2016, that the Fed is close to achieving its employment targets and 2% inflation. Earlier last week, New York Fed President William Dudley said that a rate hike would be possible at the Fed’s next policy meeting in September 2016. Moreover, other U.S. economic indicators have recovered over the last two months, strengthening the prospect of a U.S. rate hike in the coming months. This in turn has resulted in the dollar rallying, putting pressure on gold and other precious metals.

Fischer’s comments come ahead of a speech scheduled on Friday, August 26th, 2016, in Jackson Hole, Wyoming, by Fed Chairperson Janet Yellen, who is expected to provide guidance on the interest rate policy. Janet Yellen’s speech on Friday will have the biggest impact on short-term market moves, especially if she follows in Stanley Fischer’s relatively hawkish tone.

Spot silver hit a seven-week low of $18.79 an ounce and was down over 2% on August 22nd, 2016. Silver has rallied 37% this year while gold jumped 26% as the Fed refrained from tightening and other central banks embraced negative rates, benefiting the bullion, which does not pay interest. Platinum was down 0.7% at $1,102.65, while palladium fell 0.8% to $702.52.g3

Dollar rise on hawkish Fed comments

Meanwhile, the dollar strengthened against a basket of major currencies, while Asian stocks and commodities retreated as hawkish comments from Fed Vice Chairman Stanley Fischer boosted the likelihood of a U.S. interest rate rise this year. The greenback initially gained on hawkish comments from New York Fed President William Dudley and Atlanta Fed President Dennis Lockhart. The dollar index, which tracks the greenback against a basket of six major rivals, was up 0.4% at 94.894. Bloomberg’s dollar index rose to a one-week high after Fischer said that the U.S. economy is already close to meeting the central bank’s goals and that growth will pick up in the near-term.

Source: Bloomberg
Source: Bloomberg

In a related development, the yen dropped 0.6% to 100.84 per dollar after the Bank of Japan (BOJ) Governor Haruhiko Kuroda commented that the BOJ is conducting a comprehensive review of Japan’s economy and finances and there could be more easing at next month’s policy meeting. Softer July 2016 inflation data this Friday may raise the odds for a more aggressive BOJ easing. Moreover, expectations that the BOJ would not rule out a deeper cut to negative interest rates also weighed on the yen and supported the dollar.g5

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