Gold Prices Fall As Investors Buy Into Federal Reserve Narrative

GoldGold Prices Tumble to Fresh Five-Year Low

In early trading on Tuesday, November 17, gold prices hit a new five-year low; the precious metal price dropped below $1,080 an ounce for the first time since 2010. The precious metal gave away all the gains accumulated a day earlier in the wake of terrorist attacks in Paris, France.

One of the biggest reasons gold prices could be witnessing a pullback is due to the speculations about the Federal Reserve raising interest rates, as it is widely believed that as interest rates go higher, gold prices will decline. Furthermore, an interest rate hike is causing the value of the U.S. dollar to rise. This, in turn, is also affecting the value of the precious metal.

Another factor making investors nervous about gold prices are the subdued inflation figures in the U.S. The Bureau of Labor Statistics recently reported that the prices in the U.S. economy improved by 0.2% in October after declining a similar amount in September. For the first 10 months of 2015, inflation has only been 0.5%. (Source: U.S. Bureau of Labor Statistics, last accessed November 17, 2015.)

A Beam of Light for Gold Investors

Meanwhile, on the global level, there are events that could work in favor of those who are bullish toward gold prices.

Just a few days ago, the Japanese Cabinet Office announced that Japan’s economy is in recession for the second time since 2012. Japan’s gross domestic product (GDP) for the quarter ended September 30 contracted by 0.8%. In the previous quarter, it had contracted by 0.2%. (Source: “Japan’s Gross Domestic Product: Third Quarter 2015,” Cabinet Office, November 16, 2015.)

An economy is said to be in a technical recession when it witnesses contraction in its GDP for two consecutive quarters.

Contraction in Japan’s GDP leaves room for the Bank of Japan to provide further quantitative easing. The central bank has been involved in quantitative easing, buying stocks and keeping interest rates low in order to boost economic activity. This could generate demand for the precious metal and send gold prices higher.

John Paulson Remains Bullish on Gold Prices

Furthermore, big gold investors continue to have faith in the precious metal.

Billionaire hedge fund manager John Paulson’s Paulson & Co. held 9.23 million units of the SPDR Gold Trust (NYSEArca:GLD) exchange-traded fund (ETF) in the third quarter, which was unchanged from the previous quarter and valued at roughly more than $957 million.

The hedge fund also held Agnico Eagle Mines Ltd (NYSE:AEM), AngloGold Ashanti Limited (NYSE:AU), IAMGOLD Corporation (NYSE:IAG), International Tower Hill Mines Ltd. (NYSEMKT:THM), and Randgold Resources Ltd. (ADR) (NASDAQ:GOLD). (Source: “Paulson & Co. 13F,” Securities and Exchange Commission, November 16, 2015.)

Stay in the loop. Follow Moe on Facebook and Twitter.