Gold prices fell sharply in mid-September as an unexpected increase in US retail sales in August drove up the dollar.
Analysts see risks that gold could fall further due to expectations the US central bank could soon start withdrawing stimulus measures for the world’s biggest economy.
All eyes turned to the September 21-22 Federal Open Market Committee meeting in which the U.S. Federal Reserve (Fed) may give indications on when and how it could taper its asset purchase programme and give clues on when it could move towards raising interest rates.
Gold benefits from stimulus measures as the yellow metal is seen as a hedge against inflation and currency debasement. An environment of very low interest rates can boost the investor appeal of non-yielding bullion.
Gold was down 2.25 percent at $1,754.25 per ounce on September 16, having earlier touched a more than one-month low of $1,744.30 per ounce.
“There are indications that some degree of tapering in bond purchases by both the U.S. Fed and the European Central Bank (ECB), which is seen as negative for the gold price, could commence this year but there has to remain a degree of uncertainty on timing related to the spread of Delta Variant COVID-19 related infections and deaths,” wrote Lawrie Williams, gold market commentator with bullion dealer Sharps Pixley.
“Any tapering delays – even into early next year – would possibly give the gold price another leg up, while any confirmation of proceeding with it this year may well have already been written into the gold price equation.”
In Britain, the pound rose against the dollar on September 15 after UK inflation hit a more than nine-year peak, raising expectations that the Bank of England could move towards raising interest rates from their present historic lows.
UK consumer prices jumped by 3.2 percent in annual terms in August, impacted by the “Eat Out to Help Out” scheme that cut restaurant prices at the height of the pandemic in 2020.
Underlying price pressures remain strong, analysts say, with inflation in the UK, stripping out the “Eat Out to Help Out” effect, seen above the Bank of England’s 2 percent target.
Some analysts see risks that the Bank of England could tighten monetary policy before the Fed and ECB. The Bank of England sees UK inflation rising to 4 percent this year.
Several analysts anticipate that it the Bank of England were to raise rates, it would likely not happen before 2022.
A climate of rising interest rates could underpin the pound against the dollar, making it cheaper for UK savers to acquire gold.
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Frequently asked questions
Why did gold prices fall sharply in mid-September?
Gold prices fell sharply in mid-September due to an unexpected rise in US retail sales during August, which strengthened the US dollar. Additionally, investors grew cautious over expectations that the US Federal Reserve would soon withdraw its economic stimulus measures. The prospect of the US central bank tapering its asset purchase programme and moving towards higher interest rates generally reduces the appeal of gold.
During this period, gold fell 2.25 percent to $1,754.25 per ounce on September 16, having previously touched a monthly low of $1,744.30. Because gold is traditionally used as a hedge against inflation and currency debasement, any reduction in financial stimulus can weaken its market value. A low-interest-rate environment typically supports non-yielding bullion, so signals pointing to rate hikes and tapering measures create downward pressure on gold prices, as seen in these mid-September market movements.
How does the tapering of bond purchases by central banks affect gold prices?
Tapering of bond purchases by major central banks, like the US Federal Reserve and the European Central Bank, is generally viewed as a negative driver for gold prices. When central banks scale back their stimulus measures, it suggests an improving economy and raises expectations for interest rate hikes. Because gold is a non-yielding asset, a rising interest rate environment makes it less attractive to investors compared to yield-bearing alternatives.
However, uncertainty surrounding the timing of these tapering measures remains. This uncertainty is primarily driven by the spread of Delta variant COVID-19 infections and deaths. Market experts note that any unexpected delays in tapering, potentially pushing the timeline into early next year, could give gold prices another boost. Conversely, if central banks confirm they are proceeding with tapering this year, that outcome may already be factored into current gold prices.
What impact is rising UK inflation having on interest rate expectations?
Rising UK inflation, which reached a nine-year peak of 3.2 percent in August, has fueled expectations that the Bank of England may tighten monetary policy and raise interest rates. This annual jump in consumer prices was partly influenced by the “Eat Out to Help Out” scheme, which artificially lowered restaurant prices during the pandemic in 2020. Even when stripping out this effect, underlying price pressures remain strong and sit above the bank’s target.
The Bank of England expects UK inflation to rise further, potentially reaching 4 percent later this year. Consequently, some market analysts believe the Bank of England could tighten its monetary policy ahead of both the US Federal Reserve and the European Central Bank. While several analysts anticipate that an actual interest rate hike is unlikely to happen before 2022, the anticipation of tighter policy continues to influence market dynamics.
How does a stronger British pound affect UK buyers looking to purchase gold?
A stronger British pound generally makes it cheaper and more affordable for UK savers to acquire gold. When the pound rises against the US dollar, British buyers gain more purchasing power because gold is internationally priced in US dollars. This dynamic was observed in mid-September when the pound strengthened following high UK inflation figures, which increased expectations of an impending interest rate hike by the Bank of England.
A climate of rising interest rates typically underpins the pound against the US currency. If the Bank of England decides to tighten its monetary policy and raise rates from their historic lows, it could further strengthen the pound. Even though rising rates can sometimes weigh on global gold prices, the stronger exchange rate provides a distinct advantage to UK-based investors, lowering the domestic cost of purchasing physical gold assets.
What physical gold and silver products are currently offered by the store?
The store offers a selection of physical gold and silver products, including branded coins and investment bars. Customers looking for silver can purchase several collectible items. These include the Silver Tola Padma Lakshmi Coin, the PureJewels Ganesh Silver Tola, and the PureJewels’ Krishna Silver Tola, each priced at ninety pounds. Additionally, a vibrant colour edition of the ten-gram Silver Ganesh Coin is available for eighty-five pounds.
For those interested in physical gold investments, several options are available to order. The selection features various sizes of Baird and Company fine pure gold bars, including a one-ounce bar, a fifty-gram bar, and a one-hundred-gram bar. Investors can also order the prestigious Gold one-ounce Britannia coin, minted in twenty-four carat gold. These gold bullion products provide options for savers looking to acquire physical metal during shifting economic conditions.
