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Gold price slumps despite rise in demand for physical gold; anticipated fed rate hike weighs

FXStreet (Mumbai) - On 11th November gold price hit a five-year low settlement of $1,084.90 an ounce. A sharp drop in the price was recorded post the release of the U.S. October jobs data as the report heightened rate hike speculation. Prices had hit a three-month low on 6th November. Any event that raises possibility of rate hike by the U.S. Fed from its current record low level weighs on the yellow metal. Rise in rate as well as dollar hurt non-yielding gold.

Price slumps despite strong demand for physical gold

It is rather strange that the gold price has been dipping even when demand for physical gold is on the rise in China which happens to be one of the biggest global markets for the precious metal. The current strength of the US dollar and the weakening of the yuan could not deter demand. Ideally the situation should have favoured a rise in gold price. Unfortunately, however demand could not lift prices any higher.
Gold is comparatively still better off than other commodities which have registered steeper fall on slowing global economy.

Gold price improved slightly post Paris attack

Markets opened lower on 16th November post the terrorist attacks in Paris that left 129 dead. Investors rushed to seek shelter in safe havens to protect them from any fallout. Gold, which is considered to be a safe store of value inevitably gained from this and rebounded from the near-six-year lows. Reuters noted that in the first ten minutes of trading in New York on 16th November some 3,000 lots changed hands, ten times more than the average level over the past two months. During the Asian trading session on 16th November gold rose to $1,098.
Markets have however begun to recover. European equities closed rallied in the early trading hours yesterday. As a consequence gold is now again heading lower.

Also, a Fed rate hike looks certain now on the back of strong jobs data and encouraging CPI figure. A decision in favour of a rate hike will case gold to decline further in comparison to to income yielding assets and the US dollar.

Rate hike supports income-yielding assets vis-à-vis gold

The Federal Reserve may increase rates this December after keeping it at record lows for almost a decade now. Reports on economic indicators like that on employment and inflation present a strong case for a December rate hike. Number of speeches by Fed officials in recent times has given the impression that FOMC members are moving towards backing a rise. New York Federal Reserve President William Dudley who is more dovish in his stand compared to his peers has also said "it is quite possible that the conditions the committee has established to begin to normalize monetary policy could soon be satisfied."

While income generating assets benefit from rate hike, non-yielding commodities like gold take a beating. Rise in dollar increases the cost of buying gold for overseas investors. Hence rise in dollar also negatively impacts gold price.

Traders are now worried as financial investors have already reduced their holdings in gold funds to the lowest level since the collapse of Lehman Brothers in September 2008.

Where is gold price headed?

The future with respect to where gold price headed is not certain. Some analysts opined that gold could possibly further decline to $800. However there are some who strongly believe that there would be high physical demand for gold and low stockpiles once the rates begin to normalize. In the event of which gold price would begin to recover.

If Fed does not hike interest rates in December defying current forecasts, gold price can register short-term bounce back of above $1,100 an ounce.

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