How Strongly Can Interest Rate Hikes Play on Gold?
Fed rate hikes
Fluctuations in precious metals over the past month have been strongly determined by the Federal Open Market Committee’s decision to increase the interest rate. The Fed hiked the interest rate on Treasuries after 12 months. Before that, it took almost a decade to move the rate higher. Rising interest rates push precious metals lower.
With the rise in the Treasury yield, the opportunity cost of holding gold is increasing. Investors would rather park their money in yield-bearing assets than in non-yield-bearing gold. Higher yields mean investors would rather secure their money in yield-bearing Treasuries than in non-yield-bearing gold.
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Short-term interest rate target
Gold fell more than $120 from its peak on November 9, 2016, after the US election. The fall suggests optimism in the market due to a potential interest rate hike. As we saw in the previous parts of this series, the chances of a rate hike are increasing. Precious metals could see more of a negative impact.
Officials said that they raised their short-term interest rate target. It moved from 0.25%–0.50% in place since last December to 0.50%–0.75%. The decision to bring in as many as three hikes in 2017 also caused additional pessimism in gold.