Gold and Copper Find Common Enemy as Fed Rate Bets Boost Dollar

  • Odds of December rate increase seen rising to 51 percent
  • Traders expect FOMC minutes to be hawkish, Think Markets says

Haven gold and flagship industrial-metal copper typically move in opposite directions. Not today, as the dollar rallied on the Federal Reserve’s next action.

The Bloomberg Dollar Spot Index advanced, pushing down prices of the two metals, after two regional Fed officials signaled that interest rates may rise at least once this year. The rally in the greenback makes raw materials more expensive for holders of other currencies. Investors will parse the July Fed meeting minutes due Wednesday afternoon for clues on the timing for the rate hike.

After climbing 25 percent in the best first half in almost four decades, the rally in gold futures is slowing, while copper struggles to gain traction. The dollar has strengthened amid signs of the U.S. economy’s resilience to withstand another increase in borrowing costs, despite slowing global growth. Traders are pricing a 53 percent chance that rates will rise by December, up from 36 percent at the start of this month, Fed funds futures data show.

“Today’s FOMC minutes may influence the odds in favor of a rate hike during the month of December,” Naeem Aslam, the chief market analyst at Think Markets U.K. Ltd., wrote in a note, referring to the Federal Open Market Committee. “Traders are expecting that these FOMC minutes will be hawkish. This strength in the dollar has pushed the copper price lower.”

Gold futures for delivery in December slipped 0.6 percent to settle at $1,348.80 an ounce at 1:43 p.m. on the Comex in New York. Copper futures for December delivery declined 0.8 percent to $2.1635 a pound.

For more on gold’s performance post-Brexit, click here.

New York Fed President William Dudley, who serves as vice chairman of the FOMC, warned investors they are underestimating the likelihood of increases, and Atlanta Fed chief Dennis Lockhart said he’s confident growth is accelerating, setting the stage for at least one rate rise this year. 

“Dudley was definitely the one who put the cat amongst the pigeons,” said David Govett, head of precious metals at Marex Spectron Group Ltd., a broker in London. “The move was exaggerated, catching the currency markets short dollars and long gold.”

He said further direction is likely to come from the minutes of the Federal Open Market Committee’s July policy meeting, due for release Wednesday at 2 p.m. in Washington. 

In other metals news:

  • China, the world’s top producer of refined copper, boosted output to the highest level in at least five months as margins increased.
  • On the London Metal Exchange, copper, nickel and tin declined while aluminum, zinc, and lead gained.
  • Harmony Gold Mining Co., Newcrest Mining Ltd. and Yamana Gold Inc. paced declines by gold mining stocks. Steel and iron-ore producers also retreated along with the price of iron ore as Morgan Stanley highlighted the approach of winter in China typically blunting steel demand and output.
  • On the New York Mercantile Exchange, platinum and palladium futures fell.
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