The gold price fell to its lowest for more than five years as the precious metal was buffeted by the deal to avert a Greek bankruptcy, a potential US interest rate increase and a sharp sell-off in China.
Gold encountered a wave of selling in Asia that drove it down almost 4% to as low as $1,088 an ounce before recovering slightly to $1,114. The last time gold traded at that level was March 2010.
The fall was prompted by heavy trading in China, the world’s biggest consumer of gold. The drop was exacerbated by the triggering of stop-loss orders, which are trades arranged to limit a trader’s loss on an investment as the price falls.
China said on Friday that its gold reserves had increased by 57% from the last time it adjusted its figures six years ago, sending the gold price down on the day. Analysts at Barclays said gold could have fallen following the announcement because investors realised China would not increase reserves that much again, cutting off a strong source of demand.
The Chinese sell-off added to the easing of market turmoil over Greece that helped send the price of gold down each day last week. Greek banks have started to reopen and Greece is expected to use a bridging loan from the EU, agreed last week, to make a €4.2bn (£2.9bn) repayment to the European Central Bank.
Gold is traditionally a safe harbour in times of financial uncertainty but it pays no returns, leading investors to move money into other assets once calm returns to the markets.
The Barclays analysts said: “Gold continued its price deterioration last week, as relative calm returned to the global markets. We believe that gold should trade around current levels, but do not dismiss the possibility of further price declines, given the lack of safe haven interest.”
The analysts said gold could weaken further in the third quarter of the year as the prospect looms of an interest rate increase in the US, probably in September.
Following strong inflation and jobs figures, Janet Yellen, the US Federal Reserve chair, told Congress last week that the Fed was on track to increase rates if the economy continued to grow.
Gold usually falls when the US dollar rises because investors sell some gold to buy the dollar. A rising dollar also makes gold more expensive. The dollar rose to near a three-week high of 124.15 yen.
Gold’s fall pulled down the price of other metals such as palladium and platinum. Randgold, the gold producer, was the second-biggest faller in the FTSE 100 index amid a general sell-off of mining companies.
This article was written by Sean Farrell, for theguardian.com on Monday 20th July 2015 09.25 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010