Gold Drops as Traders Fixate on This Week's U.S. Rate Decision

  • ETP holdings extend fall, hedge funds bet on price declines
  • Market expecting Fed to raise rates at meeting on Wednesday

Examining the Unknowns of a Federal Reserve Rate Hike

Gold dropped before the Federal Reserve’s meeting this week as investors bet that policy makers will raise U.S. interest rates for the first time in almost a decade. Silver slipped to a six-year low.

Traders see a 78 percent probability that the Fed will raise borrowing costs at the Dec. 15-16 meeting, according to data tracked by Bloomberg. Higher rates tend to strengthen the dollar and cut the appeal of holding precious metals, which don’t pay interest. Shares of Barrick Gold Corp., the world’s largest producer of the metal, and Goldcorp Inc. tumbled.

Gold touched a five-year low earlier this month and investors are dumping holdings of exchange-traded products backed by the metal. U.S. government data show that money managers are wagering on further price declines. Traders will be looking for an indication on the pace of interest-rate increases, which Fed Chair Janet Yellen has said will be gradual, Commerzbank AG said in a note.

“Everybody certainly seems to think that we’re going to see the rate hike,” Frank Lesh, a trader at FuturePath Trading LLC in Chicago, said in a telephone interview. “This is your last-minute adjustments.”

Gold futures for February delivery slipped 1.1 percent to settle at $1,063.40 an ounce at 1:37 p.m. on the Comex in New York. Prices are down about 10 percent this year, set for a third annual loss, the worst streak since 1998.

ETP Holdings

Holdings in gold-backed ETPs fell 0.9 metric ton to 1,464.6 tons on Friday, the lowest since February 2009, data compiled by Bloomberg show. Hedge funds and other speculators are holding a net-short position of 14,089 contracts, according to the U.S. Commodity Futures Trading Commission.

South African gold producers slumped as the rand strengthened after President Jacob Zuma backtracked on this decision to appoint a little-known former small-town mayor as finance minister. The five-member FTSE/JSE Africa Gold Mining Index slid 8.5 percent, led by a drop in Harmony Gold Mining Co. Shares of Toronto-based Barrick fell as much as 8.9 percent., while Vancouver-based Goldcorp retreated as much as 7.8 percent in Canada trading.

A weaker rand last week sent South African gold prices to a record. That benefits the country’s miners because they get their revenues from gold sales in the U.S. currency, while their costs are in rand.

Silver futures dropped as much as 1.9 percent to $13.62 on the Comex, the lowest since 2009. Platinum and palladium climbed on the New York Mercantile Exchange.

Before it's here, it's on the Bloomberg Terminal.