Gold falls to 5-yr low as investors exit

Expectations of rate hike by Fed trigger sell-off; spot price in London hits $1,144 an ounce, last seen in November 2009; in rupee terms, metal down to Rs 25,750 per 10g

The price of gold hit a five-year low on Wednesday due to a heavy pullout by investors, to divert their funds into riskier assets following expectations of an interest rate rise by the US Federal Reserve on strong recovery in the American economy.

Spot gold’s price in London hit $1,144 an ounce, previously seen on November 19, 2009. Gold recorded a decline of two per cent or $26 to trade at $1,140 an oz early Wednesday. In rupee terms, however, gold slipped to Rs 25,750 per 10g, a decline of about two per cent from the previous close.

Gold is currently passing through a triple hit — a strengthening dollar, strong recovery in the US economy favouring global equity markets and a “sooner than expected” rise in US interest rates. The Japanese government’s decision to pump fresh money into the system has also threatened gold’s appeal as a safe-haven investment avenue.

“Gold hit the lower end of the cost of production, widely estimated at $1,150 an oz. At this level, we expect more miners will come forward for panic selling. But, perhaps investors are awaiting the outcome of the European Central Bank (ECB) meeting scheduled for Thursday. Widely, expectations are that ECB will announce a stimulus for the region’s economies to recover from a steep downturn. Once this is announced, inflation in the European region will go up. With surplus money in hand, gold will see some buying as a hedge against inflation, to take gold at $1,175 an oz,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.

Gold has fallen 40 per cent from its lifetime peak of $1,900.23 an oz on September 5, 2011. It has slipped 11 per cent since October 1, 2014. Despite most global gold mining entities reporting either lower third quarter profits or a slip into losses, none has announced a production cut so far. However, a sustained level of below-cost production (below $1,150 an oz) will prompt a production cut, resulting in disruption of supply. Meanwhile, euro zone retail sales fell 1.3 per cent in September as against a gain of 0.9 per cent in August. The United Kingdom Services Primary Manufacturing Index (PMI) fell to 56.2 in October from 58.7 in September.

“If ECB holds on to stimulus, then gold will see the next resistance at $1,135 an oz and then $1,100 an oz, translating at Rs 24,700 per 10g in rupee terms,” said Thiagarajan.

Gold also gets a downward pressure from declining holdings in the SPDR Gold Trust, the world’s largest gold-backed exchange traded fund. Gold holdings under this Trust declined 0.3 per cent on Tuesday to 738.82 tonnes, its lowest since September 2008.

“Spot gold prices are trading lower as strength in the dollar index kept investors away from the safe-haven asset. Also, holdings in SPDR Gold Trust, which slumped to a fresh six-year low on Tuesday, are acting as a negative factor,” said Naveen Mathur, associate director, Angel Broking.

With Japan’s economic booster, the yen has fallen heavily to 111.05 against the dollar. The rupee closed flat at 61.40 but the euro and sterling traded weak at 1.2564 and 1.5969 against the dollar, respectively. On the Multi Commodity Exchange (MCX), gold was trading lower by 1.9 per cent at Rs 25,650 per 10g.

Also, spot silver prices are trading negative, taking cues from weakness in gold and base metal prices. Adding to the weakness, strength in the dollar index is also acting as a negative factor for prices. On the MCX, silver prices plunged by 4.5 per cent and touched a low of Rs 33,730 a kg.

Weak sentiment also surrounded silver, which recorded a five per cent decline to trade at $15.29 an oz on Wednesday. The metal went below $15.21 an oz, translating to Rs 34,000 a kg in Indian markets.