Gold prices crashed to a new ten-month low on Thursday, as the US dollar reigned supreme following the Federal Reserve’s decision to raise interest rates for the first time in a year.
Gold for February delivery fell 3% to $1,129.20 a troy ounce on Thursday, its lowest since early February. The futures price was last seen trading at $1,131.70 a troy ounce early Friday.
Demand for silver also crashed on Thursday, with the March futures price plunging nearly 7% to $16.05 a troy ounce. That was its lowest since June.
Gold Prices Decline
Bullion has now dropped $170, or roughly 13%, since the start of November. The decline has accelerated in recent weeks, as investors became convinced the US central bank will raise interest rates this month.
Those expectations came true on Wednesday, as the Federal Open Market Committee (FOMC) voted to raise the target for the federal funds rate to between 0.5% and 0.75%. It was only the second interest rate increase in a decade.
While the move was widely expected, the Fed’s hawkishness took many market participants by surprise. Policymakers now expect the federal funds rate to rise three times next year and an additional three times in 2018, bringing the benchmark rate back in-line with the long-term average.
The central bank’s hawkish signal sent the US dollar soaring to nearly 14-year highs against a basket of other major currencies. Since the Wednesday rate announcement, the dollar has gained roughly 2% against its main basket of competitors.
The announcement propelled the USD/JPY exchange rate past 118.00 for the first time since February. Meanwhile, the euro reached its lowest level against the dollar since 2003.
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An environment of rising interest rates and a stronger dollar is negative for gold, which doesn’t pay interest. A surging dollar also makes it more expensive for users of other currencies to invest in gold, which is priced in the greenback.
The Federal Reserve’s next interest rate hike will come in June, according to the 30-day Fed Fund futures prices, which have long been used to convey the market’s opinion on US monetary policy.
A more aggressive policy tightening schedule may trigger a bigger divergence between gold and the US dollar in 2017, as investors are already expecting the possibility of faster inflation stemming from the proposed policies of President-elect Donald Trump. A pro-growth agenda centred around massive fiscal spending and even bigger corporate tax cuts may force policymakers to up the ante when it comes to rate increases. Therefore, it will be difficult, if not impossible, to disassociate gold’s future performance with expectations around monetary policy.
The Fed’s path is a major departure from that of other major central banks, which are either easing monetary policy or keeping rates lodged at record lows to stimulate growth and inflation.
Mixed US Data
US economic data have been mixed this week, but the underlying trend remains supportive of stronger growth. Last week, the Fed Bank of Atlanta forecast GDP growth of 2.6% in the fourth quarter. While lower than its previous estimate, it reflects a solid continuation of Q3 trends, which saw the economy break from a moribund pattern through the fist half of the year.
The Commerce Department will release its third and final estimate of Q3 GDP next week. The revised estimate released last month showed the US economy expanded at an annualized 3.2% in the third quarter. That’s up from a previous estimate of 2.9% and the fastest pace in two years.
This article was written by Evdokia Pitsillidou, Head of Risk Management at easyMarkets.