Gold prices fell below the 4,000 USD/ounce mark for the first time since November last year as the prospect of higher interest rates in the US and the strong rise of the USD caused the nearly three-year rally of the precious metal to stagnate.
In the trading session, gold prices at one point fell by 3.8%, below $3,960/ounce. Meanwhile, silver prices also fell below the $60/ounce mark for the first time since December.
The USD continues to be the biggest pressure factor on the precious metals market. The index measuring the strength of the greenback has increased by nearly 1% just this week, making gold and silver more expensive for investors holding other currencies.
Mr. Darwei Kung - Head of Commodity of DWS Group - said that the gold market is currently almost completely responding to expectations about the monetary policy of the US Federal Reserve (Fed).
Gold prices are fluctuating mainly according to market expectations that interest rates in the US will continue to rise," he said.
According to Mr. Kung, Fed Chairman Kevin Warsh's continuous emphasis on inflation control has strengthened expectations that the Fed will maintain a tougher stance for a longer time.
The prospect of tight monetary policy has pushed the USD up, thereby creating more pressure on gold. In addition, trend-following investment funds also continued to maintain selling positions, making the decline of precious metals even stronger.
After three consecutive years of double-digit growth, gold prices have more than doubled thanks to strong buying power from central banks, investment funds and individual investors.
However, the upward momentum began to weaken from the end of January, right after gold set a record high of nearly 5,600 USD/ounce.
By the end of June, gold prices had fallen more than 20% compared to historical peaks – a threshold often seen as a sign that the market is entering the "bear market" phase.
According to analysts, one of the main reasons why gold is under pressure is the sharp increase in energy prices in recent times.
High energy costs have increased inflationary pressure, forcing the market to adjust expectations in the direction that the Fed will continue to raise interest rates. This reduces the attractiveness of gold compared to profitable assets such as US government bonds.
In the past week, a series of large investment banks have simultaneously lowered their gold price forecasts.
Although the new forecast levels are still higher than the current prices, these organizations have become significantly more cautious than before.
Goldman Sachs has cut $500 in its year-end forecast, currently expecting gold prices to reach around $4,900/ounce.
Meanwhile, Deutsche Bank lowered its Q4 gold price forecast by 17%.
According to Deutsche Bank, one of the reasons why the short-term outlook becomes less positive is that capital continues to withdraw from gold-backed ETFs.
This bank believes that demand from ETF funds - which are traditional sources of support for the market - is currently "clearly absent".
In addition, the fact that gold prices in China are trading lower than prices on the Comex exchange also shows that import demand may hardly become a driving force to support the market in the short term.
However, experts still see an important bright spot.
According to DWS Group, gold buying demand from central banks remains very strong.
In the first quarter of this year, the amount of gold added to reserves by central banks reached the highest rate in more than a year. Surveys also show that many central banks plan to continue to increase the proportion of gold in foreign exchange reserves.
Mr. Darwei Kung predicts that this year will continue to be a vibrant year for the gold buying activities of central banks.
According to him, many countries, especially China and Russia, still have a need to diversify reserve assets and reduce dependence on the USD. This trend is expected to continue to provide support for gold prices in the long term, even when the market is still under pressure from high interest rates and a strong USD in the short term.
