Gold Drops to Three-Week Low as Fed Points to Possible June Hike

Why a Fed Rate Hike May Hurt Demand for Gold
  • Odds of a U.S. interest rate increase in June surge to 30%
  • Silver futures post the biggest decline since March on Comex

Gold fell to a three-week low as Federal Reserve minutes showed policy makers may raise U.S. interest rates as early as next month. A gauge of bullion mining stocks dropped as much as 5.3 percent.

Fed policy makers indicated that a June interest-rate increase was likely if the economy continued to improve, boosting expectations that the central bank will act next month. The metal has retreated from a 15-month high of more than $1,300 an ounce set in early May as traders priced in a greater chance of higher rates, which cut the appeal of owning non-interest-bearing assets such as gold.

Gold is up about 18 percent this year as the U.S., the world’s biggest economy, posted its weakest expansion in two years during the first quarter, boosting the metal’s appeal as a haven. Gold’s gains have slowed and are headed for the first monthly decline in 2016 as Fed Funds futures show the odds of a move in June have surged to 30 percent, from 4 percent at the start of the week.

‘Profit Taking’

“All of a sudden a June rate hike seems to be back on the table,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said in a telephone interview. “Gold is in this situation where speculators are already heavily long invested, so there’s a risk-off broad-based profit taking from investors cutting their extremely high net-long positions on gold.”

Gold futures for June delivery slid 1.5 percent to settle at $1,254.80 an ounce on the Comex at 3:40 p.m. in New York. The price earlier reached $1,244.60, the lowest since April 28.

The 14-company Bloomberg Intelligence Global Senior Gold Valuation Peers index has plunged more than 7 percent in the past two days.

In other metals news:

  • Holdings in gold-backed exchange-traded funds rose 2 metric tons to 1,827.3 tons as of Wednesday, the highest since December 2013, data compiled by Bloomberg show.
  • Silver futures for July delivery fell 3.7 percent to $16.493 an ounce on the Comex, the biggest loss since March 23.
  • On the New York Mercantile Exchange, platinum and palladium also dropped.
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