Gold tumbles on global commodities rout, falling prices ahead of Fed's rate hike prospects

The rout in commodities deepened with prices heading for the lowest close since 2002 as the prospect of higher US interest rates sent gold tumbling.
Raw materials are losing favour with investors as the dollar gains amid signals from Federal Reserve Chair Janet Yellen that the central bank may raise rates this year on the back of an improving US economy.

Higher borrowing costs curb the attractiveness of commodities such as gold, which doesn't pay interest or give returns like assets including bonds and equities. The Bloomberg Commodity Index dropped as much as 1.1 per cent, falling for a fifth day in the longest stretch of declines since March.Gold futures sank to the weakest in more than five years while industrial metals, grains, Brent crude and US natural gas also slid as a measure of the dollar climbed to the highest since April 13.

“Any increase in US interest rates should further strengthen the dollar, prompting more fund outflows from commodities, metals and emerging-market assets,“ Vattana Vongseenin, the chief executive officer of Phillip Asset Management in Bangkok, said by phone.

With raw materials fetching lower prices, shares of commodity producers are tumbling. Stocks of metals and energy firms led losses on the MSCI World Index on Monday. The Bloomberg Commodity Index slid to as low as 96.5366 and was down 0.9 per cent at 96.712 at 12:32 p.m. London time. A close at that level would be the lowest since June 2002.

The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers, climbed as much as 0.2 per cent. It has gained for four straight weeks, the longest winning streak since the period through March 13.

Gold futures in New York traded 1.7 per cent lower at $1,112.70 an ounce after slumping as much as 4.6 per cent in early Asian trade, losing more than $50. Spot bullion lost as much as 4.2 per cent.

The slide, which increases the prospect of a third annual drop, follows a revision on Friday by China to its official gold reserves that showed while the holdings increased, the gain was smaller than had been estimated by analysts.

“The market is in one of its bear phases, where any news is bearish news,“ said David Baker, Sydneybased managing partner at Baker Steel Capital Managers. “People had expected China's holdings to be higher,“ said Baker, who manages about $150 million and holds shares in gold miners. US natural gas futures for August delivery dropped as much as 1.6 per cent to $2.823 per million British thermal units, after capping the biggest weekly gain since June 12 on Friday.

China's Been Hoarding Gold And It Isn't Likely to Stop

With China finally coming clean that it's been the second-biggest buyer of gold over the past six years, analysts and traders say the purchases will continue. In the first update since 2009, the People's Bank of China said on Friday that it owns about 1,658 metric tonne, implying purchases of 100 tonne a year.

The stockpile may eventually reach more than 5,000 tonne, according to Robin Bhar, an analyst at Societe Generale in London. “China hasn't been very open about its strategy, so what matters now is whether the market believes they intend to continue buying,“ said Joni Teves, an analyst at UBS Group in London.