Gold prices rally poised for a slowdown in the months ahead

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Gold futures on Friday suffered their largest daily decline in two weeks, paring their gain for the latest week as the guesswork around the Federal Reserve’s next interest-rate move continues.

Spot gold was down 0.3 percent at $1,348.31 per ounce at 0655 GMT. December gold fell $11, or 0.8%, to settle at $1,346.20 an ounce. That was the sharpest point and percentage loss since the beginning of August. Gold still saw a gain of roughly 0.2% for the week.

September silver  finished at $19.317 an ounce, down 42.3 cents, or 2.1%. That left the white metal with a roughly 2% weekly decline.

Seemingly dovish July policy meeting minutes issued last week have since been followed up with at least two speakers for the U.S. Federal Reserve expressing general economic optimism and concern about waiting too long to reverse rates.

In addition, the U.S. dollar strengthened last Friday, cutting demand for precious metals which are priced in the currency.

Interest rate expectations are the driving force behind the recent moves in both the dollar and gold. Expectations of higher interest rates in the U.S. support a stronger dollar while they weigh on the price of precious metals.

A rate increase can occur as soon as in the coming months, even as soon as in September, as number of economic indicators demonstrative optimistic data. U.S. economic data will continue to offer clues on the Fed’s next move.

The current ‘ultra low’ interest rate environment has sent global investors on a search for yield. So any suggestion of an interest-rate increase makes U.S. dollar investments more attractive to international investors, leading to an increase in the value of the of the greenback vs. other currencies across the globe.

Higher interest rates also typically put pressure on non-interest bearing assets such as gold, as there’s an opportunity cost associated with owning gold because investors sacrifice whatever interest they could be earning on the funds they have invested into the precious metals.

A rate hike at the December meeting is more likely, however, because the third-quarter figures will also be available by then.

Looking forward, traders are most likely to opt for assets that promise higher returns that non-generating yield gold, so equities will be favored in the months ahead.

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