Gold prices plummeted by 5.8% on Monday morning to a 5.5-year low of $1071.19 per ounce on renewed selling pressure in China. Prices have since recovered to around $1115 per ounce but still remain at levels last seen in spring 2010.
Today’s losses follow a 1% drop on Friday, which was triggered after China revealed that it has bought 604 tonnes of gold since 2009 – when it last revealed the size of its gold reserves. China now holds a total of 1,658 tonnes in gold reserves. But this figure is much lower than what analysts were expecting and translates to purchases of around 100 tonnes per year, which is less than that of Russia.
It is estimated that China’s gold reserves still make up only 1.6% of the country’s total foreign reserves, compared to 70% for the US Federal Reserve. This suggests that more buying is still to come from China, providing some long-tern support to bullion.
Apart from sluggish demand from China, subsiding fears over Greece and the Eurozone recovery, as well as the agreement on Iran’s nuclear program, have also weakened gold’s safe-haven appeal. But what has surprised investors more is the lack of a major rally in prices while the latest Greek debt crisis was escalating since the start of the year. Unlike the previous crisis in 2011, when gold prices hit a record of $1920.80 per ounce with strong demand seen by European investors.
The biggest impact though on gold’s current bearishness is the prospect of the US Fed’s first rate rise since 2006, which is expected to come in the autumn of this year. Higher interest rates in the US and a stronger dollar would reduce gold’s attractiveness. The greenback has already been rallying since the second half of 2014 – rising by over 20% – on anticipation that the Fed will start raising its target rate in 2015.
Although expectations have gradually shifted from early 2015, to the summer and now to the autumn, Fed Chair Janet Yellen gave her strongest indication yet in her testimony to the US Congress that the time for a rate hike is nearing.
Other metal prices such as platinum and silver also fell in response to bullion weakness. Platinum prices had fallen by almost 5% to levels last seen in January 2009 before cutting losses to 1.4% at $980.53. Silver also recovered earlier losses from a low of $14.49 to climb to $14.70.
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