Rising yields decrease gold, whilst supply concerns increase copper

Due to a spike in U.S. interest rates, gold prices dropped on Friday and were projected to conclude the week in the red. Treasury rates rocked the markets, but copper prices recouped a portion of their weekly losses when a major commodity trader warned of a serious metal shortfall.

10-Year U.S. Treasury Notes Treasury Notes Treasury yields rose 2.2% overnight and were at their highest level since the 2008 financial crisis, as expectations grew that the Fed will dramatically increase rates in November. This also bolstered the dollar, although it appeared poised for a little weekly decline.

As of 20:29 GMT, spot gold fell 0.1% to $1,626.52 per ounce, while gold futures fell 0.4% to $1,630.90 per ounce (00:29 GMT). This is the second consecutive week in which both assets have declined.

This year, the price of bullion dropped significantly, reaching its lowest level in two years, as rising interest rates in the majority of the world increased the opportunity cost of owning gold. In addition, projections that central banks would continue to raise interest rates to battle inflation cloud the outlook for gold.

The possibility that the Federal Reserve would increase interest rates by 75 basis points at its November meeting is virtually priced into the markets. Recently, members of the central bank cautioned that if inflation does not abate in a timely manner, interest rates could rise significantly more than anticipated.

In turbulent trade, copper prices sank as markets weighed deteriorating economic trends against the possibility of a supply shortage.

Copper futures fell 0.3% to $3.3890 a pound and were expected to lose approximately 1% over the next seven days. On Thursday, however, prices of the red metal jumped when Trafigura, one of the world's leading commodity merchants, warned that the supply of the red metal substantially lagged behind global demand.

The co-head of metals and minerals trading at Trafigura, Kostas Bintas, told the Financial Times that despite economic headwinds in China and Europe, demand for the red metal, which is used in a variety of important applications, has remained robust. Copper demand in electric vehicles and associated infrastructure has more than compensated for a deficiency in China caused by a slowing real estate sector.

Copper supplies were restricted this year due to a strike at the world's largest copper mine, Escondida, and U.S. sanctions against important Russian suppliers. In contrast, copper prices have declined dramatically this year due to fears that a global recession could depress demand.