Gold Posts Largest Weekly Decline Since July, Gold Coin Premiums Fall
Gold futures fluctuated this week on changing expectations for the timing of future rate hikes, but surprisingly had a muted response to Friday’s much anticipated speech by Fed Chair iJanet Yellen. Yellen was positive about the health of the US economy, which opened up the potential for a rate hike as soon as September.
Gold futures finished Friday’s session only marginally lower, but fell 1.5% over the week, the commodity’s largest weekly drop since mid-July.
Gold futures fluctuated this week on changing expectations for the timing of future rate hikes, but surprisingly had a muted response to Friday’s much anticipated speech by Fed Chair Janet Yellen. Yellen was positive about the health of the US economy, which opened up the potential for a rate hike as soon as September.
In terms of physical gold investments, premiums on gold coins versus spot priced declined this week, suggesting waning interest in holding physical gold. Premiums on American gold coins were the highest this week. The leader was American Buffalo coins, whose premium over spot was at $60.81. American eagle premiums were $59.48. Last Friday, American Buffalo coins were demanding a premium of $62.20 over spot gold and American Eagle premiums were $60.85. The decrease in gold premiums could account for the sentiment that a rate hike will likely happen by the end of the year. Last week, that sentiment was much more mixed. On Friday, premiums on Australian Philharmonic gold were $49.57 and premiums on Canadian Maple were $46.27.
An increase in interest rates is a negative for gold because when interest rates increase they make gold compete with yield-baring assets for investor's interest. Demand to hold physical gold is one of the biggest losers of higher rates because there is a storage cost associated with holding physical gold.
While Yellen’s comments support a rate hike, on Friday alone the markets took her statements only lightly. Around the same time that Yellen’s comments came out the US released a piece of negative economic data. Even though Yellen maybe, right now, confident in the state of the US economy, that opinion can quickly change. The next time the Fed will meet and make a rate decision will be at the end of September. According to CME’s FedWatch Tool market participants currently see a 36% chance that the Fed will increase rates in September.