Gold slumped 3 per cent to its lowest level since the UK vote to leave the EU as investors eye a US interest rate hike later this year and demand remains weak in India and China.
The price of the precious metal fell by the most in more than a year to touch $1,270.4, its lowest level since June 24, the day after the referendum. Shares in gold miners also fell. .
Gold’s 21 per cent rally this year has started to stall as investors take profits and anticipate a second rise in US interest rates in December.
Higher US rates could be negative for gold, as they make other yield-bearing assets more attractive. Expectations for a rate rise have also boosted the dollar, which hit a 13-day high against a basket of major currencies.
Investors have piled into gold-backed exchange traded funds this year buying more than central banks for the first time since the financial crisis, according to Deutsche Bank.
But inflows have started to slow with investors buying 11 tonnes of gold in September, the lowest level since April, according to data compiled by Bloomberg.
Sales of gold coins in the US such as the Gold Eagle, a popular way for retail investors to gain exposure to bullion, have also been weak amid higher prices, according to analysts.
“It would appear that weaker physical demand has put the brakes on the rise in gold prices,” analysts at Commerzbank said.
Net sales volumes to retail investors in the US of gold and silver coins and bars fell 40 to 50 per cent in the third quarter, according to Thomson Reuters GFMS.
Interest rate futures are now implying a 61 per cent chance of a Fed rate hike in December.
But key will also be inflation and inflation expectations, which could boost gold, even if the Fed hikes rates. Low inflation and weak global growth could sustain low real yields — the yield after taking into account inflation — a positive for gold, according to Deutsche Bank.
Analysts at Citi expect gold to trade between $1,300 to $1,350 a troy ounce until the Fed could decide to raise rates for a second time in December, after which prices will decline in 2017.
Without ETF buyers, gold has also had little support from consumers in India and China.
India’s imports of gold fell 43 per cent in September due to weak retail demand, according to provisional data compiled by GFMS, while in China, imports of gold from Hong Kong fell to their lowest level since January in August.
That could improve ahead of the Chinese new year and as the Diwali festival approaches in India. The discount between local Indian gold prices and international prices is narrowing, according to HSBC.
Investors are also positioning for a rise in gold prices if Republican candidate Donald Trump wins the US election in November. They are selling options expiring before the election to buy options expiring after November 8, according to analysts at Citi.