Gold drops below $4,300 and silver falls 3.8% as the dollar hits a two-month high

Gold fell below $4,300 an ounce on Wednesday and silver dropped almost 4%, as the dollar climbed to its strongest level in about two months and Fed officials kept talking about more rate increases. Spot gold was at $4,280, down 1.8%, and spot silver was at $64.49, down 3.8%, at 11:53 a.m. ET on the Chronicle markets board. A second feed, gold-api.com, showed $4,283 and $64.63 a few minutes later.

The dollar index was at 100.76, up 0.6% on the day. Platinum and palladium fell too, down 2.3% and 2% by mid-morning in London, according to a Reuters report carried by Kitco.

Why it moved

The trigger was the same one that sent the 10-year Treasury yield to a 19-year high this morning, which we covered here. The Fed raised its benchmark rate to 3.75%-4% last week, and traders see about a 53% chance of another quarter-point hike in October, according to the CME FedWatch figures cited by Reuters. Kitco's morning report said markets are treating last week's hike as the start of a renewed tightening cycle rather than a one-off.

The level matters for traders. Reuters said gold had been trading in a narrow band between $4,300 and $4,400, and Saxo Bank's Ole Hansen told the agency that Fed comments, their effect on yields and the dollar, and oil prices were setting the short-term direction. Kitco's morning technical note put first support at $4,291, then a zone from $4,260 to $4,230. By late morning New York time gold was through the first level and sitting in the second.

The number behind the number: what it costs to hold gold

Gold pays no interest, so the price investors watch is what they give up by holding it. The cleanest measure is the real yield on inflation-protected Treasuries, which is the return left after inflation. According to Treasury's daily data, the 10-year real yield closed Tuesday at 2.63%, and the ordinary 10-year yield at 4.96%, before today's jump above 5%.

Put that in money. Someone holding $100,000 in gold is passing up about $2,630 a year in inflation-adjusted income that a 10-year TIPS would pay, or close to $5,000 a year in plain Treasury interest. Each time the market prices in another Fed hike, that cost goes up, and today fit the pattern: the dollar rose and gold fell.

Silver fell about twice as far as gold. The gold-to-silver ratio, the number of silver ounces one ounce of gold buys, rose to about 66.4 from roughly 65.0 on Tuesday, on the board's figures.

Who it hits

For jewelers, pawnshops and coin dealers that buy scrap, the drop changes today's offer price. A 10-gram 14-karat chain holds about 0.188 troy ounces of pure gold. At Tuesday's spot price of about $4,359, that was about $820 of metal. At $4,280, it is about $805. A $15 swing on one chain adds up for a shop that buys dozens a week and prices off spot.

For holders of silver, the move is larger in percentage terms: a 1,000-ounce position lost about $2,570 in value today.

What traders are watching next: weekly jobless claims on Thursday, and August durable goods orders and consumer sentiment on Friday, per Kitco's calendar, all of which feed into the October hike odds. Chart: gold, 10-year T-note.

Sources: Kitco News; Reuters via Kitco; The Company Chronicle markets board; gold-api.com; U.S. Department of the Treasury. Gold-to-silver ratio, holding-cost and scrap-value figures calculated by The Company Chronicle from those prices (14-karat gold is 58.5% pure; one troy ounce is 31.1 grams). This is market information, not investment advice.