Gold prices on reverse gear; falls down to the five year low

Early trade in Asian markets witnessed gold prices falling by 5.5% to settle below $1100 per ounce for the first time in the last five years. This is the first time after March 26, 2010, that gold prices coming down the $1100 mark.

Prices falling before the US Fed decision on interest rate hike shows that the yellow metal is undergoing a steep downward correction.

Immediate reason for price fall was the official gold holding disclosure by China. The Chinese official revelation about its gold holding was necessary as IMF has demanded it to consider the Renminbi as a reserve currency. China was revealing its gold reserves for the first time after 2009.

The Peoples Bank of China reported that its total gold holding is 1658 metric tons as on May 2015; an increase of 604 tons from the 1054 in 2009.

The Chinese data has shown that the official gold reserve holding is lesser than the expected volume.

Confirmation of bigger holdings would signal a preference for gold as a reserve asset and boost market sentiment.

But on the contrary, China has just 1.65% of the reserves, held in the form of gold compared to 1.8% in 2009. The official line was that PCB will hold nearly 2% of its foreign exchange reserves in gold. The lesser gold holding data has depressed gold prices.

A more severe price dampening factor for gold in the coming days will be the US Fed’s decision to raise interest rates. Higher US interest rate expectation has already started to depress gold prices in European markets.