Gold extends decline as Fed rate chances rise after US data

[SINGAPORE] Gold extended its decline after data on Friday showed the US economy gaining traction, raising bets that the Federal Reserve may increase interest rates this year.

Bullion for immediate delivery fell as much as 1 per cent to US$1,323.83 an ounce and was at US$1,327.24 at 2:46 pm in Singapore, according to Bloomberg generic pricing. The metal lost 2.1 per cent last week, snapping six weeks of gains. In China, silver dropped for a third day.

Gold has rallied this year as demand for haven assets surged amid volatile financial markets, uncertainty surrounding the UK's vote to leave the European Union and as the Fed paused in its monetary policy tightening path.

From a boost in retail sales to higher consumer prices, the data released Friday revives bets that the Fed will raise borrowing costs this year. US stock index futures advanced and the yen fell following a failed coup attempt in Turkey, which also undercut gold's haven appeal.

"The better US data on Friday clearly got people starting to think the Fed could actually hike this year," Wayne Gordon, executive director for commodities and foreign exchange at the bank's wealth management unit, said in a Bloomberg TV interview.

"It's not something that the market has priced, but certainly it will be a negative event for gold."

The Fed's policy-setting panel next meets July 26-27. Investors see about a 8 per cent probability of a rate increase at that meeting, according to pricing in federal fund futures contracts. Odds of a move by December were 44 per cent, up from about 8 per cent after the Brexit vote.

"Prices will probably moderate on a six-to-12 month view, but we still think they're very well-supported by negative real rates in the US," Mr Gordon said.

"Even if the Fed begins to hike, they are behind the curve, so real rates will stay negative for a while yet. If there is any pick up in uncertainty around US elections, or around Brexit, or even things in the Middle East, you are going to see people track back towards gold."

Other banks say bullion may rally further. Gold is in a major bull market and may surge to more than US$1,500 as low borrowing costs buoy demand and the US election looms, according to DBS Group Holdings Ltd.

Prices could reach that level in the next six to 12 months, said Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, also citing the prospect of low long-term rates and the US vote.

Holdings in gold-backed exchange-traded funds rose 1.45 metric tons to 2,002.46 tons on Friday, data compiled by Bloomberg show.

In China, bullion of 99.99 per cent purity fell 0.3 per cent to 286.30 yuan a gram on the Shanghai Gold Exchange.

Silver for December delivery fell 1.6 per cent to 4,394 yuan a kilogram on the Shanghai Futures Exchange.

Spot silver declined 1.6 per cent, platinum dropped 0.5 per cent and palladium retreated 1.5 per cent.

BLOOMBERG