Gold Sinks to 9-Month Lows as Dollar Flies to 20-Year Highs

© Reuters.

By Barani Krishnan

AiVIF.com -- The Fed is simply having gold bulls for lunch.

Bullion hit nine-month lows, sinking 2% to $1,700 territory for a second time in less than a week on Tuesday, as the dollar rocketed to two-decade highs, landing a withering blow to longs invested in the yellow metal.

The Dollar Index, which pits the dollar against six major currencies, leapt 1.5% to above 106.5 points, its highest since December 2002. The dollar has rallied with few stops since November last year on bets of aggressive rate hikes by the Federal Reserve, which has just started delivering on those expectations.

"The firm U.S. dollar has caused the gold price to nose-dive further, with the result that it dropped noticeably below the $1,800 per troy ounce mark," said Commerzbank analyst Carsten Fritsch.

Front-month gold futures for August on New York’s Comex settled Tuesday’s trade down $37.60, or 2.1%, at $1,763.90 an ounce. The session low was $1,763.15 — a bottom since the Oct. 2021 trough of $1,758.

It was the second time gold had forayed to $1,700 depths after Friday’s tumble to $1,781.

India and China alternate as the biggest buyers of gold and any policy moves by the two on the metal typically get traders in the space flustered.

Friday's move down in gold came after India, the world’s second-biggest bullion consumer, raised its basic import duty on gold to 12.5% from 7.5% on Friday — potentially impacting demand ahead of third-quarter festivities that typically result in gold buying.

Traders also attributed gold’s malaise to the Federal Reserve’s non-stop chatter about rate hikes, matched by the highest increase in 28 years in June by the central bank in efforts to curb inflation growing at its fastest pace in four decades.

Bullion bulls have been wounded for weeks by the Fed’s rate cudgel as policymakers at the central bank showed no backing down in their aim to tame the inflation beast.

The Fed left rates at between zero and 0.25% for two years during the pandemic and only raised them this year in March. The central bank has said it will continue with rate hikes until inflation, running at 40-year highs of more than 8% per annum, returns to its target of 2% per year.

The Fed began with a hike of 25 basis points, or a quarter-percentage point, then raised it by 50 basis points, or a half percentage point, in May. In June, it imposed an increase of 75 basis points, or three-quarters of a percentage point — its highest since 1994.

The Fed is expected to push ahead with another 75 basis point rate hike at its upcoming July meeting, but the path for September is less clear.