Gold price falls to five-year low

<p>The drop comes as investor focus on possible US rate rise.</p>

The gold price has fallen to its lowest since March 2010 as investors' focus moved from Greece's debt crisis to the US Federal Reserve, with speculation rife on the timing of an interest rates hike.

Talk of a 2015 US interest rate rise has led investors to sell the precious metal, with the gold price falling four per cent today (July 20th) to $1,088.05 (£697) an ounce in Asian trade.

“This kind of sharp drop during early Asian hours is a strong indication that a big fund is selling their holdings of gold,” Gnanasekar Thiagarajan, director of Commtrendz Risk Management, told the Wall Street Journal.

The drop came despite the fact that China, the world's largest gold producer, announced on Friday that its reserves had increased by 59 per cent to 1,658 tons as of the end of June.

"That should drive the price up but that's not what we're seeing in the market these few days. And the reason for that is because, currently, the price level is heavily driven by the futures market and not the physical market," Luke Chua, sales and operations manager at Bullion Star, told Voice of America.

Investors are moving away from gold, considered a haven in times of uncertainty, and turn instead to the US dollar, which rose after the recent release of a string of solid US data and an improvement across global markets. 

IMF warns against 2015 rate hike

Analysts now expect that the Fed could start to normalise rates this year, after Fed chair Janet Yellen reiterated last week the view that the central bank was on track to rise rates in 2015.

This is despite the International Monetary Fund (IMF) has urging the US Federal Reserve not to raise interest rates before next year, arguing that a 2015 rate hike risks adding to the growing economic and political threats to US growth.

The IMF also warned that a rate rise would trigger more gains in the value of the dollar, at a time US share prices are hitting unsustainable levels. The dollar has risen about 20 per cent against a basket of currencies during the past 12 months and "growth could be significantly debilitated" by another rise in the dollar, it said.

IMF managing director Christine Lagarde believes that a gradual rise in the US benchmark federal funds rate would be appropriate, while higher rates could cause market volatility.

In a speech last spring, Janet Yellen confirmed that rate increases would be gradual: "After we begin raising the federal funds rate, I anticipate that the pace of normalisation is likely to be gradual(…) We have no intention of embarking on a pre-set course of increases in the federal funds rate after the initial increase."

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