Gold Declines as Prospects for U.S. Rate Increase Boosts Dollar

Updated on
  • Fed officials say two rate rises this year may be warranted
  • Odds of U.S. rate hike in June rise to 14% from 4% on Monday

Gold retreated for the first time in four sessions as prospects for higher U.S. interest rates boosted the dollar, hurting the metal’s appeal as an alternative investment.

Atlanta Federal Reserve President Dennis Lockhart and San Francisco’s John Williams said Tuesday that at least two interest-rate rises may be warranted this year, while Dallas Fed President Robert Kaplan said action at “upcoming meetings” will be appropriate. On Tuesday, U.S. data showed the cost of living climbed in April by the most in three years.

Traders put odds of a move next month at 14 percent, up from 4 percent on Monday, and see a 68 percent chance of an increase by year-end, according to Fed-funds futures. Higher rates curb bullion’s appeal against interest-bearing assets. The Bloomberg Dollar Spot Index reached the highest since March before the Fed releases minutes of its April meeting later Wednesday.

“We saw two officials yesterday came out and said they wouldn’t be surprised if we had two or maybe more rate hikes this year,” Phil Streible, a senior market strategist at RJO Futures in Chicago, said in a telephone interview. “If that happens, you’re going to see a strengthening in the dollar and you’ll see that knee jerk reaction that interest rates would rise in June, and that hurts gold.”

Gold futures for June delivery dropped 0.2 percent to settle at $1,274.40 an ounce at 1:43 p.m. on the Comex in New York.

In other metals news:

  • The risks surrounding the U.K.’s vote on leaving the European Union next month and the U.S. presidential election may see gold rising to $1,400 this year, according to Ole Hansen, the head of commodity strategy at Saxo Bank A/S.
  • Holdings in gold-backed exchange-traded funds rose 3.9 metric tons to 1,825.3 tons as of Tuesday, the highest since December 2013, data compiled by Bloomberg show.
  • Silver futures for July delivery declined 0.7 percent to $17.132 an ounce on the Comex.
  • On the New York Mercantile Exchange, platinum and palladium dropped.

— With assistance by Kevin Crowley

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