New Year's Bounce: Does Gold Have Shinier Prospects in 2017?

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Part 7
New Year's Bounce: Does Gold Have Shinier Prospects in 2017? PART 7 OF 13

The Fed’s 2017 Rate Hike Trajectory Could Weigh on Gold

The Fed’s interest rate hike

On December 14, 2016, the Federal Reserve finally raised interest rates by 25 basis points. More concerning from an investor’s point of view is the Fed’s targeted total hike of 75 basis points in 2017. 

The Fed increased its projected rate hike from two quarter-point hikes to three quarter-point hikes from its September 2016 estimate.

The Fed&#8217;s 2017 Rate Hike Trajectory Could Weigh on Gold

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However, the Fed’s minutes for its December meeting were less hawkish than expected. Fed officials were motivated to a large extent by the market’s reaction to Donald Trump’s win in the US presidential election. Markets are anticipating an aggressive fiscal policy from Trump.

Many officials are expecting fiscal stimulus measures such as infrastructure spending and tax cuts to boost economic growth. Investors should note that the Fed expected to raise interest rates four times in 2016. As we know, there was only one rate hike in December. Any under-delivery on the expected outlook of the rate hike scenario should be bullish for gold.

Fed hike versus gold

Gold is highly sensitive to rising rates, which increase the cost of holding non-yielding assets and boost the US dollar, from which gold gets its price. Since gold pays no interest, rising returns from US bonds and other markets are seen as negative for the precious metal.

While a rate hike would be seen as a negative for gold, investors should note that, following the first rate hike of the current tightening cycle in December 2015, gold started 2016 on very solid footing. The Fed’s rate hike had been anticipated by market participants for some time.

Impact on gold investments

Gold prices are expected to remain volatile (VIXY) (VXX) going forward due to uncertainty over Trump’s policies. Any follow-through on these promised policies could increase the possibility of a rate hike and lead to a rise in the US dollar.

A rising dollar and rising yields don’t seem to be playing out well for precious metals (GDX) (SLV), whose weakness will likely also be apparent in the prices of miners such as Eldorado Gold (EGO), Kinross Gold (KGC), Alacer Gold (ASR), and Silver Wheaton (SLW).


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