THE focus in the gold market this week shifted from the Greece crisis to the US, as bullion prices plunged to their lowest in eight months after US Federal Reserve chairwoman Janet Yellen reaffirmed an interest rate hike later this year.
Gold for August delivery closed trading on Wednesday at US$1,147.40 per troy ounce on the Comex unit of the New York Mercantile Exchange, down 0.53 per cent or US$6.10 from Tuesday. Gold futures last traded lower than this on Nov 6, 2014.
Also on Wednesday, Ms Yellen had told the US Congress that the economy was continuing to improve despite a backdrop of turmoil overseas, and that the Fed was on track to raise interest rates for the first time in almost a decade later this year.
This was a reinforcement of a June report, which indicated that 15 of the 17 Federal Open Market Committee (FOMC) members were still expecting a rate hike this year.
Gold prices are negatively correlated to US real interest rates, which is the rate of interest after adjusting for inflation. Higher real rates increase the opportunity cost of investing in gold, which earns no interest.
Stefan Graber, Credit Suisse head of alternative investment strategy, private banking and wealth management, said in a report that the Greek debt saga has failed to spur much interest in gold.
Instead, market participants have appeared to focus on the US interest rates and foreign exchange dynamics where the recent rise in US Treasury yields and re-strengthening US dollar have triggered exchange-traded fund (ETF) liquidation.
On Thursday, the total gold holdings of SPDR Gold Shares, the world's largest gold-backed ETF, stood at 709.07 tonnes, down from 711.44 tonnes at the start of July, and 806.03 tonnes in the year-ago period.
The outlook for gold appears bleak for the near- to medium-term at least.
For now, Credit Suisse economists are predicting a September rate hike.
Mr Graber, who predicts gold trading at US$1,100 over the next three months, and US$1,000 over the next 12 months, said: "In the face of our expectations for an extended uptrend in the US dollar and a sustained pick-up in yields as we get closer to the Fed rate hikes, investor interest is likely to vanish further, and leave gold vulnerable."
OCBC Bank's economist Barnabas Gan also reaffirmed his prediction for "at least one rate hike in September or December this year", depending on how the current economic climate - including Greek woes and the Chinese stock plunge - turns out.
Christophe Bernard, chief economist at Vontobel Asset Management, which invests in both US and international securities, said it is "very unlikely" that gold producers will reduce their output - even in the scenario of lower gold prices, given that the downward trend in gold production costs looks set to continue.
"Excess supply is likely to remain an issue at a time of lacklustre investor demand."
At this juncture, risks of inflation appear muted, given the low oil prices, while higher US interest rates later this year will be an effective drag on gold prices.
For OCBC's Mr Gan, the only caveat to supported gold prices will be the scenario in which current risks in Greece and China worsen to justify safe-haven demand.