What Caused the Decline in the Precious Metals?
Gold fell on yet another day on Thursday, January 26, reaching its two-week low level. Gold fell almost 0.8% to $1,190.2 per ounce, and silver fell 0.5% to close at $16.8. Platinum lost only a marginal 0.1% and gave a close at $976.7, while palladium dropped 0.4% to $726.2 per ounce.
The reason behind the loss in these beloved metals was likely the firmer US dollar and the relative strength in the US Treasury bond yields and equity markets. (A stronger dollar weighs down dollar-based assets because they get more expensive for the investors of other countries. For this reason, demand feels the impact.)
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We should note here that precious metals are often known to follow a different route from the overall market sentiment. They are famous as safe-haven assets, which means that they increase with the rise in market risk and fall as risk declines.
To be sure, the performance of US stock markets and related yields could have increased due to the spending projections of President Trump, and these could keep on boosting the US economy going forward. But only time will tell for sure.
The above chart is a depiction of the comparative price performance of gold and the US Treasuries with two- and ten-year rates of interest. It’s often seen that the prices of precious metals suffer as the rate of interest offered on Treasuries rise. But the opportunity cost of holding non-yield bearing assets rises as interest surges.
In any case, the fall in precious metals during the last quarter of 2016 was due to the phenomenon of the Fed’s rate hike. Specifically, the precious metal mining shares of Royal Gold (RGLD), B2Gold (BTG), Pan American Silver (PAAS), and Barrick Gold (ABX) suffered due to the interest rate rise. Mining funds that also accurately follow precious metals include the iShares Gold Trust (IAU) and the iShares Silver Trust (SLV), which have seen 30-day-trailing gains due to the rise the price of precious metals.