Gold futures hit 5-year low on US rate outlook, China inventories

Gold fell to the lowest in more than five years on Monday, extending a fourth week of losses, amid the prospects of the first interest rate hike in the US in almost a decade and after China reported smaller inventories of the precious metal than analysts expected.

Gold for delivery in August traded 1.48% lower at $1 115.1 per troy ounce at 07:14 GMT, having earlier declined to as much as $1 080.0. The precious metal slid 1.05% on Friday to $1 131.9, settling the week 2.2% lower.

Investors have turned bearish on the yellow metal as the Federal Reserve is broadly expected to initiate its first increase in borrowing costs since 2006, which has sent the dollar soaring and has weighed on dollar-denominated raw materials. The US currency has also recently drawn support by better-than-expected economic data that supported the view of a robust economic recovery, while gold lost a key safe-haven support as Greece agreed to creditors terms for reforms in exchange for a third bailout that would allow the indebted country to remain in the euro area.

Fed Chairwoman Janet Yellen reiterated in her testimony before US Congress last week that the central bank remains on track to lift borrowing costs this year for the first time in nearly a decade. Her comments were in line with the FOMC’s most recent policy statement and a speech she held on July 10th when she underscored a continued weakness in the US labor market but also expressed confidence that the US economy will continue to grow steadily in 2015, helping improve labor conditions.

Investors tend to turn bearish on gold at times of economic growth and rising interest rates as the precious metal yields returns only through price gains, while other instruments that pay interest, such as bonds, tend to become more attractive.

The US dollar index, which gauges the greenback’s strength against a basket of major currencies led by the euro, was little changed for the day after it earlier hit a 3-month high. The September contract stood at 97.960 at 07:14 GMT, down 0.03%, having earlier jumped to 98.195, the highest since April 23rd. The US currency gauge rose 0.2% on Friday to 97.989, settling the week 1.9% higher.

Further pressuring the metal, China updated its bullion reserves on Friday for the first time since 2009, saying that it has bought 604 tons of gold since 2009, second only to Russia, but the 57% increase to 1 658 tons was smaller than analysts had expected. Meanwhile, money managers are holding the smallest net-bullish bets on gold since the US government started tracking data in 2006.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, fell by 11.63 tons on Friday to 696.25 tons, hitting the lowest since September 2008. Holdings in the fund have shrunk by 49% since peaking in December 2012 at 1353.35 tons.

Vattana Vongseenin, chief executive officer of Phillip Asset Management Co. in Bangkok, said for Bloomberg: “Any increase in U.S. interest rates should further strengthen the dollar, prompting more fund outflows from commodities, metals and emerging-market assets. The Greek drama will continue to improve significantly with European countries’ leaders signaling they want to keep the country in the group.”

Pivot points

According to Binary Tribune’s daily analysis, August gold’s central pivot point on the Comex stands at $1 135.3. If the contract breaks its first resistance level at $1 141.1, next barrier will be at $1 150.2. In case the second key resistance is broken, the precious metal may attempt to advance to $1 156.0.

If the contract manages to breach the S1 level at $1 126.2, it will next see support at $1 120.4. With this second key support broken, movement to the downside may extend to $1 111.3.

In weekly terms, the central pivot point is at $1 139.0. The three key resistance levels are as follows: R1 – $1 151.8, R2 – $1 171.7, R3 – $1 184.5. The three key support levels are: S1 – $1 119.1, S2 – $1 106.3, S3 – $1 086.4.