A one-two punch of a surging US dollar and rising interest rates sent the price of gold tumbling to its lowest level since February on Thursday, hurting the shares of miners and spurring hefty liquidations of exchange traded funds that track the metal.
The price of gold in New York fell as much as 1.8 per cent to $1,122 an ounce, as the dollar rose across the board, with the euro and yen each falling more than 1 per cent. Shares of gold miners retreated as the precious metal extended its retreat from July’s peak of $1,366 an ounce.
While gold remains up 6 per cent for the year, that marks a near-collapse for a metal that in July was sitting on a gain of 30 per cent. Although typically a haven in times of turmoil, gold provides no yield for investors, which makes it a less attractive investment compared with other assets that offer income streams when interest rates increase.
A firmer dollar and higher US borrowing costs — after the Federal Reserve nudged its official overnight rate up on Wednesday and signalled further increases during 2017 — has compounded the selling pressure on gold, with the market primed for further liquidations from ETFs.
Ole Hansen, head of commodity strategy at Saxo Bank, said after the Fed meeting on Wednesday: “Investors trading gold through exchange traded products reduced holdings by 22 tons, the biggest one-day reduction since July 2013.”
He added: “Some consolidation can be expected sooner rather than later, with the dollar currently approaching overbought territory while bonds and gold are all increasingly oversold.”
Having helped propel the price of gold sharply higher earlier this year, ETFs are seen weighing on prospects for the sector. Fears over the health of the global economy that dominated the start of 2016 helped gold ETFs draw in about 85 tonnes a month in the first half of the year, the largest inflows since the 2008-09 financial crisis.
The GLD ETF has had outflows of $3.8bn since Donald Trump was elected US president last month, with its price dropping 12 per cent over the period.
Commodity strategists at Citigroup said: “The typically lagging ETF sector may see outflows continue to be a source of selling pressure in the months ahead, especially in light of the current macro dynamics that is favouring inflows into equities, a rotation out of government bonds leading to a back-up in yields and a strong dollar.”
Some of the mining companies were hit hard, with Barrick Gold shares falling 4 per cent. Gold Fields Limited was down 5.1 per cent, Harmony Gold Mining dropped 5.25 per cent, Agnico Eagle Mines was off 5.1 per cent and Eldorado Gold fell 4.7 per cent.
On Wednesday, the US central bank initiated the first increase in its overnight benchmark interest rate since last December, and hinted that three other rate rises could be forthcoming in the new year. That is up from a previous forecast of two.