MARKET TRENDS: Gold Prices Plummet to 5-Year Lows, Dollar Surges High

The price of gold dropped to a five-year low on Monday. Investors went bearish on precious metals in anticipation of the Fed short term interest rate hike that would push the U.S. dollar higher, and China declaring lower-than-expected gold reserves. Investors are selling off gold, which is considered the safest investment in times of crisis.

A strengthening U.S. economy has led investors to expect the Federal Reserve to raise interest rates this year. Currently, gold prices are more than 40% below the August 2011 peak. The U.S. dollar is surging higher while gold prices drop. The dollar rates have hit a three-month high on Monday, with expectations for higher U.S. interest rates.

Any increase in U.S. interest rates should further strengthen the dollar, prompting more fund outflows from commodities, metals and emerging-market assets. Gold closed 2.5% lower at $1,104.60 an ounce in London, having earlier fallen below $1,100 an ounce for the first time since March 2010.

Other commodities have also declined, with the price of platinum down 5% – its weakest level since the global financial crisis. Higher borrowing costs lessen the appeal of commodities such as gold, because the metal doesn’t pay interest or give returns like bonds and equities do.

Gold prices dropped despite a rise in China’s gold reserve, although it was lower than expected. China imported a record volume of gold in 2013 that has created an oversupply. China is the world’s biggest consumer of gold and its reserves jumped 57% to 1,658 metric tons at the end of June, compared with the last time it revealed reserve figures more than six years ago. Despite an increase in tonnage, gold accounts for 1.65% of China’s total foreign exchange reserves, versus 1.8% in June 2009.

The jump in gold prices at the beginning of the year was largely due to a weak economy that led to low retail sales and consumer spending. However, a series of encouraging jobs reports and strong retail sales in May understated the fears over consumer trends.

Equity markets posted modest gains, with the focus remaining on earnings. Shares of London gold miners were hit hard by the fall in prices. Lonmin and Fresnillo both closed 4.4% lower, while Randgold Resources dropped 4.7%. Newcrest Mining Ltd. Global equities eased off three-week highs hit on Friday, though European shares approached six-week peaks. Australia’s largest producer lost 8.8% on the Australian stock exchange, while other listed miners, such as Evolution Mining, slumped 14%, and Saracen Mineral Holdings tumbled 14%. In Hong Kong, Zijin Mining Group lost 7.6%.

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