Gold Price Weighed Down by Dollar, Economic Data

GOLD PRICE NEWS – The gold price tumbled $18.27, or 1.1%, to $1,711.60 per ounce Thursday morning after two key U.S. economic reports came in ahead of expectations.  The price of gold fell only fractionally in overnight trading, but accelerated to the downside after weekly jobless claims fell to a four-year low and U.S. housing starts reached a three-year high.  Strength in the U.S. dollar also pressured the gold price, as well as silver and the broader commodities complex.

On Wednesday the gold price climbed $10.18, or 0.6%, to $1,729.87 per ounce after the latest Fed minutes revealed continued substantial concern over the health of the U.S. economy.  The price of gold initially pared its gains as the U.S. dollar turned higher after the release of the Fed minutes, but nonetheless remained in positive territory.  The SPDR Gold Trust (GLD), which as the world’s largest gold ETF serves as a proxy for the gold price, closed with a gain of $0.99 at $168.11 per share.

In contrast to the gold price, silver finished modestly lower yesterday.  Gold’s sister precious metal retreated from an intra-day high of $33.99 to finish down by 0.3% at $33.50 per ounce.   Other precious metals were mixed, with platinum advancing 0.4% to $1,634.50 per ounce and palladium dipping 0.3% to $684.00 per ounce.  Among cyclical commodities, copper futures fell 0.1% to $3.82 per ounce while crude oil rose 1.2% to $101.90 per barrel.

The stronger gold price was unable to keep gold shares in the black, as a sell-off in the broader equity markets weighed on the sector.  The Market Vectors Gold Miners ETF (GDX) slid 0.3% to $53.56 per share, while the S&P 500 Index dropped 0.5% to 1,343.23.  Notable gold producers posting losses included Barrick Gold (ABX), Goldcorp (GG), and Randgold Resources (GOLD).  Shares of ABX, GG, and GOLD fell by 0.4%, 0.4%, and 0.8%, respectively.

Wednesday afternoon’s release of the latest Fed minutes initially put pressure on the price of gold, although the yellow metal quickly rebounded.  The minutes, which served as a recap of the most recent Federal Open Market Committee (FOMC) meeting, revealed a growing division among Fed officials over the potential for a third round of quantitative easing (QE3).

“A few members observed that, in their judgment, current and prospective economic conditions–including elevated unemployment and inflation at or below the Committee’s objective–could warrant the initiation of additional securities purchases before long,” the Fed minutes noted.

Conversely, “Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.  In contrast, one member judged that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate; that member anticipated that a preemptive tightening of monetary policy would be necessary before the end of 2014 to keep inflation close to 2 percent.”

Despite the various views at the Fed, following the minutes, Bank of America economist Michael Hanson reiterated his QE3 prediction for later this year.  “In our forecast, growth slows in the second half, convincing the majority of Fed officials to launch QE3.”

Hanson predicated his view in part on the fact that the Fed continued to project a sluggish economy in the months ahead.  The minutes noted that “With respect to the economic outlook, participants generally anticipated that economic growth over coming quarters would be modest and, consequently, expected that the unemployment rate would decline only gradually.”

With regard to inflation, the Fed disclosed that “almost all participants expected inflation to remain subdued in coming quarters.”  The lack of inflationary expectations was a key factor in the FOMC extending the time frame for its zero interest rate policy from mid-2013 to late-2014.  As such, with negative real interest rates likely to persist for the foreseeable future, the fundamental backdrop for the gold price remains particularly favorable – notwithstanding shorter-term sell-offs as seen this morning.