Gulf News - Gold hits one-week low on US central bank's rate hike signals, down Dh3 per gram in the UAE

Vijay Valecha, Special to Gulf News January 07, 2022

Gold prices slid to one-week low on Thursday as minutes of the US Federal Reserve's December meeting signalled quicker increases to interest rates, boosting the US dollar and government bond yields.

Spot gold fell 0.5 per cent to $1,801 an ounce, having touched its lowest since December 29 at $1,792.30. US gold futures dropped 1.5 per cent to $1,797.70.

In the UAE, gold prices fell Dh3 per gram on Thurday. The price of 24-karat gold was at Dh218.75 per gram, down from previous day’s Dh221.25, while 22-karat was at Dh205.0, 21-karat at Dh196.0 and 18-karat at Dh168.0.

"Going forward, the Fed sentiment will lead the way for gold and most probably keep the downside exposed. If the risk aversion deepens, it will likely reinforce the dollar’s strength even though the rally in the yields falters," said Vijay Valecha, chief investment officer at Dubai-based investment brokerage Century Financial.

"In both scenarios, gold is likely to remain on a losing end and appears vulnerable to a pull-back towards $1,760-1,770 region. In UAE, 24-karat gold price is likely to trade between Dh213 and Dh220 in the days ahead."

Investors saw the minutes from the US Federal Reserve meeting as a sign that the key lender might hike interest rates faster to cool inflation and this could lead other central banks in economies elsewhere to follow suit, Dubai-based forex traders noted.

According to minutes from the US Fed’s December 14-15 policy meeting, policymakers believe the top largest economy’s job market is nearly healthy enough and ultra-low interest rates are no longer needed.

Bullion fell last year in its biggest annual decline since 2015 as central banks started to dial back pandemic-era stimulus to fight inflation. Higher rates can dim demand for the metal because it doesn't pay interest.

The market was interpreting that "there's very likely a March hike followed by quantitative tightening, which is very bad for stocks and gold," said Jay Hatfield, chief executive officer of Infrastructure Capital Management in New York.

Aggressive US stance

The "very hawkish" Fed minutes sent the dollar and the yields significantly higher, which has not helped gold, said independent analyst Ross Norman.

The US dollar resumed its climb towards a recent 14-month high while benchmark US 10-year government bond yields rose to their strongest since April 2021.

The central bank minutes released on Wednesday showed that officials had discussed shrinking the US central banks overall asset holdings as well as raising interest rates sooner than expected to fight inflation, with an 80 per cent chance of a quarter of a percentage point increase plausible in March.

Some investors view gold as a hedge against higher inflation, but the metal is highly sensitive to rising US interest rates, which increase the opportunity cost of holding non-yielding bullion.

"Where the precious metal closes the week is likely to be heavily influenced by the key US jobs data on Friday," FXTM analyst Lukman Otunuga said in a note.

"A strong report could cripple gold bugs, opening a path lower towards $1,786 and $1,770. Should $1,800 prove to be reliable support, prices may rebound back towards $1,810 and $1,831." In other metals, spot silver dropped 1.7 per cent to $22.39 an ounce after dropping to $22.12, its lowest since December 16.

Platinum fell 0.9 per cent to $974.13 and palladium rose 0.9 per cent to $1,880.94.