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Gold Could Be Well Priced In the Fed’s Rate Hike Expectation

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Federal Reserve may raise the interest rate in 2015 while the PBOC and ECB are adding more stimuli.

The Federal Reserve will continue keeping the interest rates to near zero for a “considerable time”, even after October when it stops buying assets, according to the latest FOMC meeting. Dollar retraced lower earlier this morning.

Though the forecast on the interest rate rise was higher, Yellen added that “inflation has been running below the committee’s 2% objective,” a contrast to the panel’s July statement that it was “somewhat closer” to its goal after the latest CPI figures dropped.

Frankly speaking, it is difficult to “guess” the exact timing of the rate hike at this moment as it’s still highly data dependent. There is no “mechanical interpretation” of the “considerable time” phrase, as decisions that the committee makes about what is the appropriate time to raise its target for the federal funds rate will be data dependent.

But Gold market could reflect the Fed’s intension on the interest rate at this moment. In the futures market, Gold for December delivery lost as much as 0.6% to USD1, 208.80 on the Comex, the lowest price since January. The net-long position in futures and options fell for a fifth straight week, with speculators boosting short bets to the highest level since June this year. According to data from the US Commodity Futures Trading Commission (CFTC), the net-long position in Gold declined 22% to 55,716 futures and options last week.

Short positions, or bets on a price decline, increased 18% last week to 69,243 contracts. Silver for immediate delivery tumbled as much as 2.7% to USD17.3491 an ounce, the lowest level since July 2010.

Even hedge funds are exiting from Gold as well. Since June, as much as USD6.7 billion has been erased from the value of exchange traded funds backed by metal. Holdings in the SPDR Gold Trust, the biggest Gold backed ETP, sank on 19th September to 776.44 metric tons, the least since December 2008.

Investors withdrew about 553 tons last year as Gold slumped 28%, the most in more than three decades. The holdings are down 2.3% in September, heading for the biggest monthly drop since April. Worldwide ETP holdings fell 3.2% this year to 1,706.47 tons as of 18th September, the lowest since October 2009.

In 2013, bullion fell 28% to halt a 12-year rally as some investors lost faith in the metal as a store of value. Inflation expectations, measured by the five-year Treasury break-even rate, last week reached the lowest since December.

Although prices are down, the lower prices may help to spur physical demand for the metal. Sales of Gold coins by the U.S. Mint reached 39,500 ounces so far in September, heading for the best month since June and topping the total in August by 58%.

According to the chief executive officer of the World Gold Council Aram Shishmanian, the expansion of trading hubs in Asia will help boost demand in China by 20% in three years. Last year, China overtook India as the biggest buyer of Gold and gave foreign investors direct access to its bullion market for the first time.

In China, its central bank, PBOC, also joined its European counterpart in boosting liquidity to address weakening growth, underscoring a divergence in direction among the world’s biggest economies as the U.S. reduces stimulus. The People’s Bank of China is injecting 500 billion yuan into the nation’s largest banks, according to a government official familiar with the matter, signalling the deepest concern yet with an economic slowdown. Federal Reserve Chair Janet Yellen will announce another $10 billion cut to its monthly bond purchases after this week’s meeting, economists forecast, as she steers toward gradual interest-rate increases.

China’s credit expansion made targeted measures to shore up growth while stopping short of broad-based stimulus seen in the U.S. in the wake of the global financial crisis and still being pushed in Europe and Japan. By attaching a three-month term to its injection, China is taking a step down that path while maintaining control of a process designed to fuel demand for credit in an already debt-laden economy.

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