Gold ‘Vulnerable’ as Rate Outlook Drives Price to Seven-Week Low

Why Strategas' Chris Verrone Wants to Buy Gold
  • Investors seen shifting out of gold into equities, RJO says
  • Hong Kong retail sales seen suffering worst drop in 15 years

Gold dropped to a seven-week low as equities rallied amid signs the U.S. economy is resilient enough to withstand an increase in borrowing costs.

The S&P 500 index gained 0.8 percent, set for its first back-to-back gains in two weeks. Traders are pricing in increasing odds that the Federal Reserve will raise rates as mortgage applications in the U.S. advanced 2.3 percent in the week ended May 20. That added to evidence of a strengthening housing market after government data Tuesday showed purchases of new homes surged in April to the highest since 2008.

Gold has fallen 5 percent this month, paring this year’s rally as comments from Fed officials over the past week began to convince traders that a rate increase is looming. On Wednesday, Philadelphia Fed President Patrick Harker said he doesn’t see “significant risk vis-a-vis China,” as calmer markets reflect more stability in the Asian country.

“The economy has been strengthening and so investors should shift out of gold and back into equities,” Phil Streible, a senior market strategist at RJO Futures in Chicago, said in a telephone interview. “The fundamentals have shifted.”

For a QuickTake explainer on gold’s ups and downs, click here.

Gold futures for August delivery slipped 0.5 percent to settle at $1,226.60 an ounce at 1:49 p.m. on the Comex in New York, after touching $1,220.60, the lowest for a most-active contract since April 6. The August contract declined for a sixth session, the longest losing streak since Nov. 6.

“Gold has been vulnerable since breaking below $1,250,” said Bernard Aw, a strategist at IG Asia Pte.

The odds of a rate increase by July rose to 55 percent, from 54 percent Tuesday, Fed fund futures data show.

Gold sales by retailers in Hong Kong are forecast to have the worst downturn in at least 15 years as fewer mainland shoppers spend less money. Consumption may drop by as much as a quarter this year from 2015, according to the Chinese Gold & Silver Exchange Society in Hong Kong. 

Venezuela cut its gold reserves by 16 percent in the first quarter, according to data from the International Monetary Fund, as the country’s economic crisis deepened and the government faced concerns that it may struggle to honor bond payments.

In ETFs and other metals:

  • Holdings in gold-backed exchange-traded funds fell 0.2 percent to 1,844 metric tons as of Tuesday, dropping from the highest level since November 2013, data compiled by Bloomberg show.
  • Silver futures advanced on the Comex, while palladium and platinum slipped on the New York Mercantile Exchange.
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