Gold is trading sharply lower shortly after the regular session opening on Friday as a stronger U.S. Dollar and prospects of higher interest rates eroded its appeal, with an import tax hike by India a major bearish surprise.
At 12:28 GMT, August Comex gold futures are trading $1785.20, down $22.10 or -1.22%. On Thursday, the SPDR Gold Shares ETF (GLD) settled at $168.43, down $1.06 or -0.63%. The market is also on track for its third straight weekly loss.
Central Bank Rate Hike Prospects Weigh
Gold is beginning the new quarter with a steep loss. This is coming off its worst quarter since early last year amidst aggressive monetary policy from several major central banks. The Fed is expected to raise its benchmark interest rate by 75 basis points in late July. This will follow an expected 25 basis point rate hike by the European Central Bank (ECB). A new poll also shows the Reserve Bank of Australia is expected to raise its cash rate by 50 basis points next month.
Since gold doesn’t pay interest or a dividend, it tends to weaken when interest rates rise as investors chase the higher-yielding asset.
Strong US Dollar Driving Demand for Gold Lower
The weakness in demand for higher-yielding assets is driving investors into the safe-haven U.S. Treasury bonds, U.S. Dollar and Japanese Yen.
U.S. Treasury yields are falling as nervous investors buy bonds for protection. Meanwhile the U.S. Dollar is hovering just below a recently touched 20-year high. This price action suggests gold is not the safe-haven assets that many believe it is.
India Import Tax Dampening Demand for Bullion
Prices are also being hurt by a major increase in import duties in India. The world’s second biggest bullion consumer has raised its basic import duty on gold to 12.5% from 7.5% in a bid to bring down the trade deficit, Reuters wrote.
India increasing the import duty will immediately affect demand even though the third quarter usually see strong physical buying due to festivals, said Ajay Kedia, director at Kedia Commodities in Mumbai.
Gold prices are likely to remain under pressure as long as there are concerns over the slowing economy and aggressive interest rate hikes from the Federal Reserve dominate market sentiment.
Traders are marching to the orders of their leader Fed Chair Jerome Powell who said earlier in the week, it’s important to arrest long-term inflation expectations so that they don’t become entrenched and create a self-fulfilling cycle. That’s code for the Fed is going to do everything in its power to drive inflation lower, even if it means triggering a recession.
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This article was originally posted on FX Empire