In its last policy meeting of the year on December 15-16, the Fed is expected to increase rates by a quarter of a percentage point. Last week, it ended at $1,074/ounce, down 1.1 per cent. But the action may now begin. SPDR Gold Trust, the largest gold backed exchange traded fund, reported total holdings of 634.63 tonnes of Friday, down from 638.8 tonnes in the previous week.
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Yields retreated from multi-week lows reached on Friday, but losses were contained by oil prices hovering near 11-year lows and by scrutiny in the high-yield bond market after Third Avenue’s high yield fund and credit fund Stone Lion Capital prevented investors from exiting, heightening anxiety in the sector which is among the most vulnerable to higher US rates.
Likely flattening in the US curve is not expected to play out in Canada, said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada, pointing to the differing economic performance in the two countries. Though the general market perception is that as rates go up, non-interest bearing investments such as gold may lose sheen, this has not been true in the past.
Initially the rate hike will be of little help to savers, however, since the change will be minimal.
Other precious metals were weak, with silver falling to the lowest since August 2009 at $US13.76 per ounce.
The Fed’s decision on rates and forecasts for GDP and inflation will be known on Wednesday.
Spot gold eased 0.7 percent to $1,066.50 an ounce by 1055 GMT, while US gold futures were down 0.8 percent at $1,067.20 an ounce.
Meanwhile, core retail sales and the Producer Price Index (PPI) both came in above expectations last Friday, indicating a continued recovery in the US.
The “liftoff” on rates will also make home purchases more expensive.
Activity in options markets has suggested that stock traders are cautious ahead of the Tuesday and Wednesday Fed meeting and that options expiry for the end of next week could increase the volatility in one direction or the other.
Although sentiment among market professionals has also fallen compared to the last survey, a majority still see higher prices in the short term.
“Checking, savings and MM (money market) accounts remained flat for two months after the initial Fed rate hike”, noted the blog, written by economist Dan Geller.
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“Temporary short squeezes could disturb the long-term downward trend but we still expect prices around $US1,000 next week”, ABN Amro analyst Georgette Boele said.
