Gold’s woes continue on Monday and into Tuesday as its price continues to drop as the US dollar strength story continues. This year, gold prices are lower by approximately by 9%.The dollar is climbing ahead of the much-anticipated Federal Reserve interest rate decision tomorrow. The FOMC will begin its deliberations today and market participants are predicting the Fed will hike interest rates for the first time in nearly 10 years. If the rate hike goes through, traders will likely switch gears to monitor the pace that it try to normalize monetary policy.
Taking the rate hike into account, gold positions are being increasingly dumped by traders. Higher interest rates would further bolster the dollar, in turn drying up demand for the safe-haven precious metal, which is an asset that does not pay interest. Along the same vein, expect the same drop in demand for silver.
Analysts are expecting gold prices to plunge further in 2016. Physical demand for gold remains low from major consumers Indian and China. Chinese demand dropped from November into December. After early fall, overall demand from the Asian nation plunged by over a quarter of its demand during the summer. India is also facing decreased gold demand as reports are coming from the country of jewelers waiting until after the FOMC decision before replenishing their stockpiles. Dealers and jewelers are expecting prices to drop further and would rather wait until then to restock their inventory. In the meantime, gold is selling at a discount of up to $1 off each ounce. The Southeast Asian nation’s demand for gold is at its lowest point in about eight years.
Guest post by Donald Levit, analyst for EconomicCalendar.com