Gold price drops $30 as US Feds get hawkish

Despite a promising start ahead of the US Federal Reserve decision on interest rates on Wednesday, gold prices plummeted $30 an ounce from where it had originally been trading due to an announcement from the central bank.

Gold was exchanging from $1,145 –down more than 3 per cent from $1,183 ahead of the Fed statement, at a three week low.

Higher interest rates boost the value of the dollar and makes gold less attractive, resulting in a lack of investment in the non-yield-producing metal.

As many as one in ten gold mines have been considered uneconomical at current market prices, with the retreat from the metal originally coming from the likelihood of a future interest rate rise in the US –the first of its kind since 2006.

According to the CFTC's weekly Commitment of Traders data for the week to October 20 hedge funds added more than 47% to their long positions – bets that gold will be more expensive in the future – from the week before. Last week's rise was 66% and hedge funds have now added net long positions for five straight weeks.

After the abrupt reversal that left the level of support for gold at $1,148 an ounce, head of commodity strategy at Danish bank Saxo, Ole Hansen said, “failure to hold this level would attract some additional long liquidation as a break below $1,140 an ounce could signal a reversal of sentiment”.

The Fed voted 9 to 1 to leave rates in a range of zero and 0.25% where they have been since December 2008. Interest rates in the world’s largest economy have not been raised in more than nine years which played a huge factor in gold's rise to a record $1,909 in September 2011.

Speculators have been making deep cuts to short positions prior to gold’s highest level a fortnight ago. Since gold is expected to be bought at a cheaper price in the future, reductions of more than 20% to 3.7 million ounces have been made.



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