Commodity Blog

Gold hit a three-week low on Thursday after the latest minutes from a Federal Reserve policy meeting hinted that an increase in interest rates was likely to happen next month. June gold prices declined 1.5%, or $19.60, to settle at $1,254.80 per troy ounce. This is the lowest the yellow metal has been since April 27. Spot gold remained relatively the same at $1,255 an ounce.

Minutes released from its April 26–27 Federal Open Market Committee (FOMC) meeting suggested that policymakers were in favor of hiking short-term interest rates if the US economy showed strong growth. The minutes also revealed that officials were more confident in its two percent inflation target rate and were less concerned about the global economic slowdown:

Federal Reserve communications following the March FOMC meeting were interpreted by market participants as more accommodative than expected. In particular, investors were attentive to the larger-than-expected downward revisions to the projections of the federal funds rate in the FOMC’s Summary of Economic Projections as well as to references in the March FOMC statement and the Chair’s prepared remarks at the press conference to risks to the U.S. economic outlook stemming from global economic and financial developments.

After the minutes were published, the US dollar strengthened, which often hurts greenback-denominated commodities because it becomes costly to buyers that use different monetary units. The WSJ Dollar Index jumped 0.05 percent to 87.54.

Gold is vulnerable to rate increases. Hikes to interest rates can negatively affect the price of gold since the precious metal does not yield any interest. Gold can also have a difficult time competing with yield-bearing assets, like US Treasury notes, when borrowing costs go up.

The entire family of precious metals also experienced considerable drops following the release of the Fed minutes. July silver prices tumbled 3.7%, or 63.9 cents, to $16.49 per ounce. July platinum shed 2.8% to $1,013 an ounce, while July palladium declined 3.7% to under $559 per ounce. July copper fell 1.8 cents to $2.06 a pound.

In the midst of stock market volatility and sluggish global economic growth this year, investors have flocked to gold as a safe haven. Year-to-date, gold has soared 18 percent. In the first quarter, gold prices had their best quarterly increase in 30 years. A May report from the World Gold Council (WGC) found that gold demand soared 21 percent to 1,290 tonnes, which is the biggest first quarter increase since records were started in 2000.

Gold bugs remain confident that the yellow metal will rise in the coming years as central banks devalue their currencies.

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