Gold Falls for First Time in Seven Sessions on U.S. Rate Outlook

Jun 26, 2014 3:25 pm ET

June 26 (Bloomberg) -- Gold fell, ending a six-session rally, as a Federal Reserve official said that the central bank will raise U.S. interest rates sooner than expected, damping demand for the precious metal as an alternative investment.

Fed Bank of St. Louis President James Bullard predicted that borrowing costs will increase in the first quarter, sooner than most of his colleagues expect. Last year, gold futures fell 28 percent amid a U.S. equity rally to a record and signs that the Fed would taper monetary stimulus.

“Bullard’s comments are working against gold,” Frank Lesh, a trader at FuturePath Trading LLC in Chicago, said in a telephone interview. “Also, equities are winning all the money.”

Gold futures for August delivery dropped 0.4 percent to settle at $1,317 an ounce at 1:38 p.m.on the Comex in New York. On June 24, the price reached $1,326.60, the highest for a most- active contract since April 15.

With gold close to a two-month high, physical demand “remains lacking,” Australia & New Zealand Banking Group Ltd. said in a note.

Gold headed for the second straight quarterly gain, the longest rally since 2011, as mounting tensions in Iraq and Ukraine spurred demand for a haven. The price rose 6.8 percent in the three months ended March 31, partly on concern that the U.S. economy was stalling.

The precious metal climbed 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs near zero percent.

China Audit

China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions in another sign of possible fraud in commodities financing deals.

In China, 25 gold processors made a combined profit of more than 900 million yuan from the loans, according to a report on the National Audit Office’s website. Authorities are also probing alleged fraud at Qingdao Port, where copper and aluminum stockpiles may have been pledged multiple times as collateral for loans.

“If China continues to clamp down on these financing deals, it would likely be negative for the gold price in the short run,” Jens Naervig Pedersen, a Copenhagen-based commodity analyst at Danske Bank A/S, said in an e-mail. “More gold will be available on the market and less demand for gold from these financing deals.”

China is the world’s biggest producer and consumer of gold.

Silver futures for September delivery fell less than 0.1 percent to $21.162 an ounce on the Comex. On June 24, the price reached $21.225, the highest since March 18. Trading was 82 percent above the average in the past 100 days for this time, according to data compiled by Bloomberg.

On the New York Mercantile Exchange, platinum futures for October delivery dropped 0.2 percent to $1,471.30 an ounce.

Palladium futures for September delivery rose 0.3 percent to $835.80 an ounce.