Gold trading outlook: futures hover near 5-1/2-year lows on Fed comments

Gold fell in early European trading on Wednesday, hovering near the lowest in 5-1/2 years, after a voting Fed member reinforced speculations of an interest rate hike in September, sending the dollar soaring to the highest in 3-1/2 months against a basket of currencies.

Gold futures for delivery in December traded 0.62% lower at $1 083.9 per troy ounce at 08:14 GMT, shifting in a daily range of $1 087.6 – $1 083.6, not far off from July 24ths 5-1/2-year low of $1 073.7. The contract added 0.1% on Tuesday to settle at $1 090.7 and is down 1% for the week.

Bearish sentiment continued to dominate the gold market, although downside movement seems to have stalled since late July, as Federal Reserve policy makers said at their latest meeting that the job market has been improving, citing solid job gains and declining unemployment, fueling speculations that the first US rate hike since 2006 could come in as early as September.

These speculations were reinforced by comments by Atlanta Federal Reserve President Dennis Lockhart that the central bank is close to an increase and it would take “significant deterioration” in the coming US economic data for him to not support a rate hike in September, according to an interview with the Wall Street Journal.

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 investment instruments that pay interest, such as bonds, become more attractive.

“We suspect that we will see a steady grind lower across most commodity complexes, including gold, largely attributable to the strength of the dollar and poor technicals that will only encourage more funds to further increase their short side exposure,” said for CNBC INTL FCStone analyst Edward Meir.

The US dollar rallied to the highest in more than three months against a basket of currencies on Wednesday, with key economic data lined up through the end of the week. A report yesterday showed a strong rebound in US factory orders in June, while private employment data today may indicate a continued improvement in the US labor market ahead of Fridays government statistics, as well as an uptick in activity growth in the US sector of services.

“The Fed’s rate hike remains the key focus for gold investors, with Lockhart’s comments increasing speculation the central bank will move in September,” said for Bloomberg Ric Spooner, a chief analyst at CMC Markets in Sydney. “Friday’s nonfarm payroll data may provide further insight.”

The US dollar index contract for settlement in September traded 0.14% higher at 98.160 at 08:18 GMT, having earlier risen to 98.335, the highest since April 23rd. The US currency gauge gained 0.4% yesterday to 98.024 and is up 0.8% for the week so far.

Reflecting investors negative sentiment toward the precious metal, assets in the SPDR Gold Trust, the biggest bullion-backed ETF, fell 2.08 tons on Tuesday to 670.62 tons, the lowest since September 2008. Holdings in the fund have shrunk by little over 50% since peaking in December 2012 at 1353.35 tons.