Gold Drops Below $1,300 to Lowest Since June on Fed Rate Concern

  • Fed’s Mester says U.S. economy is ripe for a rate increase
  • UBS sees Fed tightening monetary policy at December meeting

Gold plunged the most in almost three years, falling below $1,300 an ounce for the first time since June amid mounting concern that an improving U.S. economy will push the Federal Reserve to boost interest rates soon. Shares of gold-mining companies also declined.

Fed Bank of Richmond President Jeffrey Lacker urged the central bank to raise rates to head off a likely pickup in inflation that would force bigger increases later. On Monday, Fed Bank of Cleveland President Loretta Mester said she expects the case for a hike to remain “compelling” at the next review in November. The dollar headed for the biggest gain in two weeks against a basket of currencies, curbing the appeal of gold of as an alternative asset.

The rally in bullion has faltered after the best first half of a year for the metal in almost four decades. Improving economic data bolsters the case for the Fed to increase rates this year, which would reduce the competitiveness of gold against interest-bearing assets.

“Given Lacker’s statement alone, gold is not going to respond well to that,” Tim Evans, the chief market strategist at Long Leaf Trading Group in Chicago, said in a telephone interview. “The environment that we’re in, with the expectations of a rate hike coming and no signs of inflation in the near term, is just a very negative for gold.”

Gold futures for December delivery dropped 3.3 percent to settle at $1,269.70 an ounce at 1:45 p.m. on the Comex in New York, the biggest decline for a most-active contract since December 2013. On Monday, prices closed at $1,312.70 an ounce, falling below the 100-day moving average for the first time since June.

The BI Global Senior Gold Valuation Peer Group, a basket of 14 producers, lost 7 percent, the most since July 20, led by losses in shares of Yamana Gold Inc., Kinross Gold Corp. and Newmont Mining Corp.

On Monday, a report from the Institute for Supply Management showed U.S. manufacturing expanded in September.

“Prices have eased to start the week, as stronger-than-expected manufacturing data boosted the dollar, whilst Fed officials talked up the chances of a 2016 rate hike,” Jordan Eliseo, chief economist at Australian Bullion Co., said in an e-mail.

Fed Odds

The odds of tightening at the next central bank meeting on Nov. 1-2, the week before Americans head to the polls in the presidential election, is just 19.3 percent. Still, the probability of a move in December is now 61.8 percent, up from less than 40 percent two months ago.

UBS is negative on gold in the short term as the Fed will probably signal next month that it will tighten in December, according to Wayne Gordon, executive director for commodities and foreign exchange at the wealth-management unit. Physical demand has also been weak, he told Bloomberg TV on Tuesday.

  • Holdings in exchange-traded funds backed by gold added 1 metric ton to 2,033.3 tons on Monday, according to data compiled by Bloomberg.
  • Silver futures fell on the Comex, while platinum and palladium were lower on the New York Mercantile Exchange.
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