12 Dec, 2016
Gold futures finish Friday at their lowest levels since February, marking their fifth weekly loss in a row, as the dollar firmed in anticipation of an interest rate hike at next week’s Federal Reserve meeting.
Market-based indicators put the odds of a Fed rate hike next week at nearly 100%. The move would be central bank’s second postcrisis rate hike. The first occurred nearly a year ago at the Fed’s December 2015 policy meeting.
Higher interest rates typically cause the dollar to strengthen, which often weighs on commodities like gold that have prices denominated in dollars.
Financial markets are anxiously awaiting the details of that December 13-14 meeting, including a peek at the central bank’s “dot plot,” which sketches out members’ predictions for interest rates and growth measures over the coming months. It is the pacing of the reversal of easy monetary policy next year that’s captured the markets’ attention lately, strategists say.
declined by $10.50, or 0.9%, to settle at $1,161.90 an ounce. Prices marked their lowest finish since early February, and lost roughly 1.1% for the week, according to FactSet data based on the most-active contracts. That was longest stretch of consecutive weekly losses this year.
“Near term, the outlook for gold still depends on the dollar, and the inverse relationship may fade slightly due to positioning into the Fed next week,” said Tyler Richey, co-editor of The 7:00’s Report. “Bottom line, if the dollar rally continues, so will the golden selloff.”
On Friday, the ICE U.S. Dollar Index DXY, -0.10% which gauges the buck’s strength against six other currencies, climbed 0.5%, trading about 1% higher for the week.
Strength in the buck can undercut demand for commodities, including gold, making them less attractive for holders of other currencies, and higher interest rates tend to lift the dollar and increase demand for higher-yielding alternatives to nonyielding gold.
With the Fed meeting looming, the dollar-positive monetary policy gap between the U.S. and other economic powerhouses becomes more obvious. The European Central Bank on Thursday announced it will extend its quantitative-easing program until December 2017 and possibly beyond that, which sent the euro lower against the dollar. The central bank, however, will reduce its bond-buying firepower after March. The bank did hold pat on interest rates, as expected.
As global bond yields adjust to less-easy monetary policy, gold has been increasingly reactive to yield moves. The U.S. 10-year note yield TMUBMUSD10Y, +1.12% has been hovering near 16-month highs, after a sharp advance in November following the U.S. elections.
Yields have risen along the range of bonds, but especially at the shorter-dated end, as the Fed is widely expected to raise its short-term rates by a quarter point when it concludes the two-day meeting next Wednesday. Fed-funds futures, a popular tool for traders to bet on U.S. interest-rate policy, indicate an above-90% probability for such a move.
As for gold’s response to the Fed, “an upside correction may materialize amid profit-taking on short positions as traders entertain the possibility that the central bank envisions a shallower tightening path than what has been priced in after the U.S. president election,” said Ilya Spivak, currency strategist with Daily FX.
What’s more, the general appetite for assets seen as risky has lowered demand for haven gold. The Dow Jones Industrial Average DJIA, +0.72% was poised for its fifth straight day of gains Friday, though some analysts warn that a correction may lie ahead.
The equities rally attracts “risk capital that might otherwise find a home in gold,” said Brien Lundin, editor of Gold Newsletter.
Longer term, however, “there’s plenty of evidence that gold is bottoming now, raising hopes that it will duplicate last year’s performance once the Fed gets this year’s annual rate hike in place at its upcoming December meeting.”
In other trading, March silver SIH7, -0.45% ended at $16.967 an ounce, down 12.9 cents, or 0.8%. Prices had a strong midweek advance, leaving them up roughly 1.3% for the week. March copper HGH7, +0.17% rose 2.2 cents, or 0.8%, to $2.648 a pound, ending about 0.9% higher on the week.
January platinum PLF7, +0.02% shed $28.80, or 3.1%, to $915 an ounce, for a weekly loss of about 1.7%, while March palladium PAH7, -0.35% lost $4, or 0.5%, to $735.05 an ounce, for a weekly loss of 1.3%.
Among exchange-traded funds, the SPDR Gold Trust GLD, -1.05% traded 1% lower—down about 1.5% for the week, while the iShares Silver Trust ETF SLV, -1.05% shed 0.9%, paring its weekly gain to about 1.1%. The VanEck Vectors Gold Miners ETF GDX, -3.68% lost 3.6%, raising its weekly loss to 3.2%.