Gold hits 3-week low after Fed statement

US tapering and interest rate hike may increase cost of holding, to see a massivesupport at $1,300

Gold hit three-week lows on Thursday after posting its biggest one-day fall since late January in the previous session, reacting to comments from Federal Reserve head Janet Yellen suggesting US interest rates could rise sooner than expected.

Gold prices dropped 1.8 per cent. Record low interest rates, which cut the opportunity cost of holding non-yielding bullion above other assets, were a key factor driving the precious metal to all-time highs in recent years.

Spot gold extended losses on Thursday morning to $1,325 an ounce, its lowest since February 28. It was down 0.3 per cent at $1,327 an ounce at 10:17 GMT, while US gold futures for April delivery were down $13.6 an ounce at $1,328.

“Yellen believes the US economy is improving and hence there is no need to continue low interest rates for longer period. Instead of no deadline for interest rate rise earlier, Yellen hinted the rate rise will see an upward move beginning early 2015. An upward revision in interest rate would raise the holding cost of gold. Therefore, a massive sell-off started amid scare of high holding cost of dollar-denominated commodities including gold,” said Gnanasekar Thiagarajan, director, Commtrendz Research.

“Gold will see a rebound after touching $1,300 an oz due to ongoing geopolitical tensions,” he said.

“Gold was already on the defensive as safe haven bets were closed, and the Fed news added some additional pressure,” Saxo Bank’s head of commodities research Ole Hansen said. “The market is now busy pricing in higher rates sooner than previously expected, and that could become poisonous for gold.”

Demand for physical gold in China, the world’s biggest consumer of the metal, was lacklustre on Thursday, dealers said. In the physical market, premiums for gold bars in Hong Kong were unchanged from last week at $1 an ounce to the spot London prices, and at 80 cents to $1 in Singapore.