Gold Rout as Investors Await Higher Interest Rates

Gold prices plummeted first in Asia and worsened later in trading in America on Monday as investor demand for the commodity evaporated.

The commodity’s price fell over 3% from last week’s levels on Monday, with many analysts predicting lower levels in the future. One investment bank released a note saying there are few reasons for investors to hold the metal, and that it remained overvalued relative to other commodities. Silver also fell in sympathy, although not as steep as gold.

Gold prices plummeted first in Asia and worsened later in trading in America on Monday as investor demand for the commodity evaporated.

The commodity’s price fell over 3% from last week’s levels on Monday, with many analysts predicting lower levels in the future. One investment bank released a note saying there are few reasons for investors to hold the metal, and that it remained overvalued relative to other commodities. Silver also fell in sympathy, although not as steep as gold.

One key headwind for the gold was a fall in demand from China, as the nation’s gold reserves disappointed expectations. Last week on Friday the People’s Bank of China reported that its bullion holdings were 1,658 metric tons, an increase of 57.3% from 2009. While that is a strong increase over a 7-year period, analysts had expected substantially more gold, with some estimates nearly 3 times higher than the actual amount.

Many traders were unsure how to respond to the news, so gold prices remained largely unchanged immediately after the response. Since then, the market has priced in weaker demand from China and other central banks, interpreting the low hoard as a sign that Central Banks are looking for other stores of wealth.

China’s current gold holdings are worth about $54.1 billion, making it one of the country’s smallest asset classes. The bulk of China’s wealth is stored in U.S. Treasuries.  The lower value of the yuan is boosting China’s export competitiveness.

Inflation Expectations

With Chinese demand for gold apparently muted, the market also appears to be reconsidering its expectations for inflation and the value of gold as an inflation hedge. Some as an inflation hedge traditionally hold gold, as it expects to hold its value more than paper currencies during times of high price increases.

However, several inflation expectations have fallen in recent months both as oil prices decline, making many transported goods less expensive to deliver, and as global growth expectations become more muted. Earlier this year the International Monetary Fund downgraded its global growth expectations, citing a weak recovery from the 2008 financial crisis.

In Europe, overall GDP growth expectations have remained muted, with the European Commission forecasting 1.8% real GDP growth in 2015 for the EU and 1.5% growth in the Eurozone. Growth expects to accelerate in both regions in 2016, but only the EU will see greater than 2% growth, at 2.1% for the full year.

In the United States, growth forecasts have become volatile and contradictory, after the first quarter saw a 0.7% shrinking in the first quarter at first glance—but a later estimate from the Bureau of Economic Analysis saw only a 0.2% decline in GDP.

Finally, China saw disappointing GDP growth at the beginning of the year but has since seen a surprising resurgence, with an annualized 7% rise in growth reported last week. The country is targeting 7% growth for the full year.