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First, the U.S. dollar traded near a 14-month high, on track for its ninth week of gains in a row. A stronger dollar weighs on gold, because it is priced in dollars. As the value of the dollar increases, the value of gold decreases – which means it takes fewer dollars to buy gold. This is also why some investors look to gold as a hedge against inflation.
"Broadly speaking this is a rather thin market not being driven by massive flows… the key issue is the U.S. dollar and its strength is weighing heavily on gold and that seems the prime driver," Sharps Pixley Chief Executive Officer Ross Norman said to Reuters this morning.
Second, recent hawkish words from the U.S. Federal Reserve are weighing on gold prices. 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. And last month, Federal Open Market Committee (FOMC) meeting minutes revealed that if the economy continues to strengthen more than expected, the central bank may raise rates.
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 two reasons. It pushes the dollar higher. And higher interest rates typically weaken gold prices because investors will seek out higher-yielding assets.
The Fed will hold its next policy meeting next week from Sept. 16-17. It's expected to cut its monthly bond-buying program by $10 billion and may give further guidelines on when it will hike interest rates.
"Traders and investors are already looking ahead to next week, and a more robust batch of economic data points, highlighted by the meeting of the U.S. Federal Reserve's Open Market Committee," said Kitco analyst Jim Wyckoff. "Next week is also the much-anticipated referendum on Scotland's independence from the U.K."
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