Markets move against the yellow metal as physical demand sinks, costs of holding it look set to rise, and the US dollar rises. China sentiment doesn't help either

The price has fallen sharply in London today.

It is now at a six year low, down more than -1% to US$1,057.40/oz. That is down from US$1,071 yesyterday.

In local currency it is down to NZ$1,618/oz.

Much of the drop is because of the strength of the US dollar. In NZD terms it is only a six month low.

But the slumping US dollar price has a huge impact on overall sentiment.

The imminent Fed rate rise compounds the problems for the yellow metal. Rising interest rates raise the opportunity cost for holding the commodity because it does not generate a return. It costs money to store it, and the only profit comes from capital gains. Capital losses undermine its investment value.

Physical demand factors are not good either.

India’s gold buying in the key December quarter is likely to fall to the lowest level in eight years, hurt by poor investment demand and back-to-back droughts that have slashed earnings for the country’s millions of farmers.

China has been buying more, but the most recent data on flows through Hong Kong show declines.

Precious metals funds posted their biggest net outflow last week in around four months, said Bank of America Merrill Lynch.

Other precious metals – silver, platinum and palladium – were all heading for weekly declines.

All this comes on the same day that Chinese stocks took a tumble, down more than -5% in Shanghai.

And Japanese unemployment reached a 20 year low with employment levels near record highs – but pay isn’t responding to rising labour demand. Other data showed that household spending fell -2.4% year-on-year. Deflation is stubborn against the Abenomics medicine.

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