Gold Plummets Thanks to Less Inflation-Based Price Hedging

Gold plunged to a new 10-week low as slowing global inflation reduced the demand for price rise hedges and investors preferred to stay light ahead of the key US jobs data and ECB rate decision.

Gold traded as low as $1262.20 on 3 September, its lowest since 12 June, and from the previous close of $1265.0. The yellow metal had fallen 1.72% on Tuesday as the dollar index rallied to a new 13-month high of 83.04.

The gauge that measures greenback's strength against a basket of major currencies on a trade-weighted basis has risen to a new multi-month high of 83.05 before easing to 82.90.

Since end June, or as geopolitical tensions in Russia-Ukraine and Israel-Gaza intensified, the dollar index rallied about 5% and gold has fallen more than 4%.

However, the geopolitical situation of late is not worsening - at least not to a degree matching the fall in gold or the rise in the greenback, traders said, adding that other factors such as technical selling and worries about the health of the global economy are dragging the metal lower.

"Many were long gold ahead of the long weekend as Monday was a US holiday, but with nothing major happening over the weekend on the geopolitical front, they all began liquidating positions," a Mumbai-based trader who oversees the commodity for a private bank told IBTimes UK.

Moreover, the current week is marked by a lot of key press releases such as PMI numbers, BoE and ECB rate decisions and the US non-farm payroll data.

"People will generally look to stay light on their positions ahead of such a big set of data," the trader said.

ECB, BoE and the Fed

Both the BoE and the ECB are not expected to alter the main policy rates, but the unexpected split in the BoE MPC voting with two members favouring a rate hike last time brings Thursday's meeting into brighter limelight.

Similarly, the ECB is preparing itself for more stimulus and the recent set of confidence and PMI data from the common currency area suggest the time for such a move is nearing.

Any hint by the ECB President Mario Draghi at the post-policy press meeting on Thursday about the additional stimulus will see the dollar rising further higher adding to gold's losses.

The US jobs report on Friday will be the most watched economic data as usual and the outcome will indicate where the Federal Reserve is headed in terms of policy rates as the central bank has been more concerned about addressing the slack in the labour market before any rate hike move.

Slowing Global Inflation

Another major indicator came in the recent past is the OECD inflation estimates that showed the prices in the 34-member bloc is decelerating.

The July inflation for OECD economies came in at 1.9% from 2.1% in June, year-on-year, data showed on Monday. The OECD said the trend reflects continued weak overall world economic growth.

Traders said the OECD report is another indicator for deflationary pressures in the global economy and adds to the downward pressure on commodities.