All that glitters is not gold, at least not at the moment.

Prices down

The gold market is not having a moment. Its prices are getting a bit of a drubbing, a downward slide that began in May after the market reached its peak.

Why?

What’s the reason for this? 

Bas Kooijman, chief executive officer and asset manager of DHF Capital explained that the asset’s price has been reacting to the developments in the US in particular.

It’s all about the complicated dance between key economic indicators like inflation, employment and interest rates and the behaviour of assets, like gold, in response to them.

A few days ago the Federal Reserve, which is the USA’s mighty central bank, released minutes of its meeting and guess what, they sparked expectations of higher interest rates which could make gold less attractive in the face of higher yield risk-free assets. 

Samer Hasn, market analyst at XS.com noted that pressure continued on gold prices this week, failing to consolidate above the level of $1918 an ounce, after the Federal Reserve minutes came out and the rise in the dollar and bond yields.   

What does it all mean?

So, what does this tell us?

Hasn said:“The minutes of the meeting indicated that the temporary pause in raising the interest rate in June was aimed at buying some time and waiting for more economic data to form a clearer perception about the state of the US economy, especially after the banking turmoil that led to the collapse of some regional banks. 

Hasn added: “The minutes also indicated the opposition of some members to the decision to fix the interest rate in June and the tendency to raise it by 25 basis points, in addition to talking about more hikes during the year. This hawkish tone from the Federal Reserve pushed the price of gold to decline to approximately $1915 an ounce, at the height of yesterday’s declines.”

Gold is often seen as a safe-haven asset, that is one to which investors seek refuge in difficult times when economies are in turmoil.

So if investors become more confident about the performance of the US economy they could leave the safety of gold for the excitement of other assets.

Bas Kooijman said: “At the same time, stronger-than-expected job market and PMI figures could support the Federal Reserve on its path toward tightening monetary policy. Stronger figures could, at the same time, fuel interest rate hikes while also improving investors’ confidence in the resilience of the economy, pushing them away from gold.”

That said, in the longer run there is also a possibility that the effect of higher rates on the US economy could prop up gold prices if the economy weakens, Kooijman said.

While gold could continue to see downside potential, it could see volatile trading as uncertainty piles up around the state of the economy and the next steps of the Federal Reserve’s monetary policy. Volatility could remain elevated for the remainder of the week while new data comes up.

Meanwhile traders will be bracing themselves for the release of US inflation data next week while gold could see some muted price movements in the meantime.