Gold hits four-year low on signs of US recovery

Drops 2.75% on Friday; price erosion likely to continue in near term

Gold hit a four-year low on Friday owing to selling pressure from wary investors as indications of US economic growth revived the hopes for a rise in interest rates ‘sooner than expected’.

Amid indications of a recovery in the US economy, which was supported by the US Fed’s move to withdraw its stimulus programme known as quantitative easing (QE) completely, traders offloaded their stocks. Gold fell 2.75 per cent, or $33 an ounce (oz) - one of the steepest daily declines in history - to trade at $1,166.5 an oz in early-afternoon London trade. The last time such a low level was seen was on November 4, 2009. The yellow metal has seen a decline of six per cent from its recent peak of $1,248.7 on October 21. With little change in the rupee against the greenback, spot gold in Mumbai’s Zaveri Bazaar recorded a sharp decline of five per cent, or Rs 1,400, to about Rs 26,200 for 10g and silver at Rs 37,000 a kg on Friday.

“Gold and silver prices on the MCX have declined by two per cent and 2.5 per cent in tandem with the decline in international markets. The Decline in SPDR gold holdings, falling crude oil prices and speculative interest in the commodity is dragging prices. Good GDP growth in the US has raised economic optimism and given the Fed the confidence to wind up the QE programme. Probable rise in the interest rates is acting as a negative factor for prices,” said Naveen Mathur, associate director (commodities and currencies) at Angel Commodities Broking.

Gold seems to have lost its appeal as a safe investment. The US reported a 3.5 per cent growth in the GDP in the third quarter against 3.1 per cent forecast earlier. This has raised optimism towards the US economy resulting into the Fed’s move to withdraw its bond-buying programme.

On the other hand, the Bank of Japan has surprised the markets by announcing a $726-billion stimulus package to support its flagging economy. The move comes in the wake of consumer inflation in the country cooling off in September.

This has steered a rally in global equities and dollar index also ticked higher, trading near its four-year high. The move pulled yen down to 111.05 against the dollar and also helped dollar index to surge to 86.57.

“Upbeat outlook for the US economy and labour market raised worries that the Fed would hike interest rates soon. Gold and silver prices tumbled further as robust US GDP data for the third quarter instigated a rally in equity indices and further strengthened the dollar, worsening the investment appeal of gold and silver. Investors are seen dumping precious metals, leading to a drift towards their four-year lows,” said Sugandha Sachdeva, in-charge (metals, energy and currency research) at Religare Securities.

“Having breached the crucial $1,180 an-oz-mark, gold prices are likely to trade in bearish territory and might even test $1,120 an oz in the coming days, in case of a convincing close below the same support. Silver is likely to be underpinned by $15.9 per ounce mark at COMEX.”

According to Gnanasekar Thiagarajan, director of Commtrendz Research, gold could see the next initial support level of $1,145 an oz and then, $1,100 an oz after breaching the first support level. He added that silver has also seen selling pressure. Silver prices dropped $16 an oz in the international market, resulting in Rs 35,620 a kg on the Multi Commodity Exchange. Thiagarajan said that unlike gold, silver has more potential for upside and limited potential for downside.