Gold investors brace for lower prices on interest-rate outlook

[NEW YORK] Central bankers are putting gold investors and traders on the defensive.

More than 2,500 lots exchanged hands Friday for a put option giving owners the right to sell October futures at US$1,300 an ounce, making it the most-traded option for the second straight day. The most active contract on the Comex slipped as much as 0.6 per cent to US$1,334.10.

Holdings in exchange-traded funds backed by gold fell for a second day on Thursday.

There's reason to be worried. Federal Reserve Bank of Boston President Eric Rosengren, who shifted his stance in recent months in favour of monetary tightening, warned Friday that waiting too long to raise interest rates risks overheating the economy.

Higher rates make bullion less competitive against interest-bearing assets. The comments come a day after the European Central Bank played down the prospect of an increase in asset purchases.

"The markets are quite nervous that an interest-rate hike might actually happen this month," Phil Streible, a senior market strategist at RJO Futures in Chicago, said by telephone. "Investors and traders know that gold futures have held above US$1,300 and this looks like a key level of support. It's rational for investors to be looking at protective put options at US$1,300 in the event a surprise interest rate increase occurs."

Gold futures for December delivery fell 0.5 per cent to settle at US$1,334.50 an ounce at 1:44pm on the Comex in New York, marking the third straight loss, the worst streak since July 12.

A 2016 voter on the Federal Open Market Committee, Mr Rosengren argued for years to combat unemployment with low rates. In a speech Friday, Mr Rosengren said that a "failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery."

Volume on the US$1,300 gold put options traded on the Comex more than doubled Friday, after more than quadrupling a day earlier. Holdings in gold-backed ETFs fell by 3,132 ounces to 65.27 million ounces, data compiled by Bloomberg show.

In other metals, platinum and palladium futures fell on the New York Mercantile Exchange, while silver futures slipped on the Comex.

BLOOMBERG