Today's gold prices fell to levels not seen since mid-June.
By market close Thursday, the yellow metal will have fallen for a fifth-straight session - its longest slump since June 2.
Spot gold was down $16.80 (1.32%) to $1,274.60 an ounce as of 1 p.m. EDT, after closing at $1,291.40 in the previous session.
Gold futures for December delivery on the Comex in New York also fell 1.4% to $1,275.80 after touching $1,274 earlier this morning - the lowest for a most-active contract since June 18. The decline put the yellow metal under its 200-day moving average.
Hawkish words in the Federal Open Market Committee's (FOMC) July meeting minutes, released Wednesday afternoon, are what weakened gold prices starting after-hours yesterday.
You see, last month, some Committee members commented that despite improving labor market numbers, the Fed was not going to increase short-term interest rates earlier than expected. But yesterday's minutes revealed that if the economy continues to strengthen more than expected, the central bank may change its mind.
Whether or not the Fed actually adjusts its interest rate schedule, the speculation alone moves markets in a way that's bad for gold prices, for these two reasons...
The Relationship Between Gold Prices and the Fed
The U.S. Federal Reserve's suggestion that it may raise interest rates earlier than expected did two things to weigh on gold prices.
First, it pushed the U.S. dollar to an 11-month high today. A stronger dollar weighs on gold, because it is priced in dollars.
And second, higher interest rates are bad news for gold prices, which typically weaken when rates go up because investors seek out higher-yielding assets.
"The market is digesting the likelihood of the Fed raising rates, given the improvement in the numbers," Long Leaf Trading Group chief market strategist Tim Evans said to Bloomberg. "That's very dollar-bullish, and it's creating a lot of pressure on dollar-denominated assets, especially gold."
Starting mid-year, the Fed has been hawkish on its plan to hike interest rates as soon as the first quarter of 2015. In July, Fed Chairwoman Janet Yellen said that interest rate increases may come "sooner and be more rapid than currently envisioned" should the labor market improve more quickly than anticipated.
"I guess we had to see it happen at some point, gold breaking in the face of dollar strength," FuturePath Trading broker and futures analyst Frank Lesh said to Kitco. He added that the fall in Thursday's weekly jobless claims data is "not helping those who think (interest) rates may stay low longer."
But Money Morning Resource Specialist Peter Krauth says that despite Fed policy changes, gold prices will break out in coming months.
Here's why...
Look for a Gold Price Breakout Before 2015You see, Krauth has his eye on inflation, an upward pressure on gold prices. Estimates have Americans facing inflation greater than 3% or even 4% for the rest of 2014 and 2015.
That would send gold prices higher. As the value of a currency decreases - which is an effect of inflation - the price of precious metals increases. A declining value of a currency means that it takes more of that currency to purchase an ounce of the metal.
"While the inflation rate is still relatively low, there are increasing signs of rising inflation," Krauth said. "It's still early in this trend, but once we have a few consecutive quarters of close to 2% inflation, I think the market will start to expect continuing rising inflation, making gold more attractive."
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