Gold Prices Drop Amid U.S. Dollar Rally and China’s Unexpected Pause in Gold Purchases

Gold Prices Drop Amid U.S. Dollar Rally and China’s Unexpected Pause in Gold Purchases

Gold Prices Drop Amid U.S. Dollar Rally and China’s Unexpected Pause in Gold Purchases

June 10, 2024 447 view(s)

Gold is selling at $2,315 an ounce on this Monday morning. Last Monday, Gold was at $2,350 an ounce. Why the change?  

  

The U.S. dollar's rally and the sharp rise in U.S. Treasury yields on Friday, triggered by robust jobs data, are key factors in the change in gold prices. This data aligns with the stance of U.S. monetary policy hawks, who oppose U.S. interest rate cuts by the Federal Reserve. The potential delay in interest rate cuts this year could dampen the rise in gold prices , as some investors view higher-rate Treasury bonds as competition for safe-haven precious metals. 

  

A significant twist in the gold market unfolded on Friday with the unexpected announcement from The People's Bank of China (PBoC) that they had made no gold purchases in May. This revelation, following 18 consecutive months of reported net gold purchases from China, triggered a dramatic algorithmic sell-off, causing the gold spot price to plummet by $40 in the first hour after the announcement. 

  

Gold buyers seized the opportunity to purchase gold at the $2,300 per ounce level multiple times on Friday. Krishan Gopaul, Senior Analyst at the World Gold Council, commented, "We have no indication as to whether this represents a temporary or more extended pause in their (PBoC) buying." Gopaul continues, "We are still confident that central banks as a whole will remain net buyers. " 

 

Gold Prices React to Economic Indicators Amid Fed SpeculationGold Prices React to Economic Indicators Amid Fed Speculation

This week's potential major market mover in gold will be the Consumer Price Index and the June FOMC (Federal Open Market Committee) meeting. The FOMC interest-rate decision will be announced at 2:00 pm EST on Wednesday, followed by the Fed Chair, Jerome Powell, press conference. Historically, the speech and Q&A during the Powell conference provides more insight into the longer-term possibility of interest rate movements by the Federal Reserve.  
  
A few months before inflation peaked in the United States at 9.1% in June 2022, The Federal Reserve began increasing interest rates to tame inflation. Over 16 months, the Federal Funds rate was raised 500 basis points. In simpler terms, the interest rate was increased by 5.25% and has remained at 5.5% since July 26th, 2023. Link to Fed Interest Rate History: https://www.forbes.com/advisor/investing/fed-funds-rate-history/  
  
While demand for gold remains high, the supply of new gold, as measured by the mining industry, is becoming more difficult to find. In 2021, gold mining production increased by 2.7% year-over-year. However, the rate dropped to 1.35% in 2022, and last year, it was a mere 0.5% increase year-over-year. This trend, as highlighted by John Reade from the World Gold Council, indicates that it's getting harder to find gold, permit it, finance it, and operate it. A lower supply of gold, a precious and limited resource, will inevitably favor higher gold prices in the future, a factor that investors and gold enthusiasts should keep a close eye on.