Gold bears return as traders look to rate increase

Higher rates curb the appeal of bullion because it doesn't pay interest or offer returns, unlike competing assets. Photo / Bloomberg

The gold bears are back on the prowl.

Futures in New York fell for the second time in three days amid mounting speculation that a resilient US economy will allow the Federal Reserve to raise interest rates as soon as September. Prices extended declines as a private report showed that American service industries in July expanded at the strongest pace in a decade.

Gold tumbled to a five-year low in late July on the outlook that the Fed will start tightening monetary policy. Higher rates curb the appeal of bullion because it doesn't pay interest or offer returns, unlike competing assets. Money managers have stayed net-short on the metal for two straight weeks, and banks including Goldman Sachs Group predict more declines for prices.

"Gold is becoming more and more distasteful as an asset for people to own," Phil Streible, a senior market strategist at RJO Futures in Chicago, said in a telephone interview. "Better US growth is going to reaffirm an interest-rate hike in September, and that's what is damaging gold."

On the Comex, gold futures for December delivery fell 0.5 per cent to settle at $1,085.60 at 1:44 p.m. in New York. The metal reached a five-year low of $1,073.70 on July 24.

As prices slide, mining stocks are also suffering. Shares of Canada's Barrick Gold, the world's largest producer, dropped to the lowest since 1989 in Toronto.

Fed Bank of Atlanta President Dennis Lockhart said in an interview with the Wall Street Journal that it would take a significant deterioration in data for him not to endorse raising rates in September. The Bloomberg Dollar Spot Index reached the highest in more than four months. Jobs data from the Labor Department on Friday will be closely watched for more signals on how fast rates could rise.

"There is tremendous pressure on prices" of gold, George Gero, a vice president of global futures at RBC Capital Markets in New York, said by telephone. "The strength of the dollar and the Fed's Lockhart indicating a September rate hike back on the table has damped enthusiasm for gold."

Holdings in exchange-traded products backed by bullion are at the lowest since 2009, and about $7.8 billion has been wiped from the value of the assets this year.

Since about 40 per cent of what's mined or recycled annually gets sold as coins or bars, shriveling demand from speculators could mean a prolonged bear market. Morgan Stanley says investment buying will keep dropping through at least 2018. Goldman in a report on Monday reiterated that gold may fall below $1,000.

Silver futures for September delivery fell less than 0.1 per cent to $14.553 on the Comex.

Palladium for September delivery lost 0.9 per cent to $593 an ounce on the New York Mercantile Exchange, a fourth straight decline. Platinum for October delivery slid 0.8 per cent to $950.90 an ounce, also the fourth drop in a row.

- Bloomberg