Could Trump’s Plans Boost Inflation, Hurt Precious Metals?
Patrick Harker, president of the Federal Reserve Bank of Philadelphia, repeated his view that the central bank should continue hiking interest rates this year. However, that didn’t give any buoyancy to the US dollar, and it fell marginally.
Gold is highly sensitive to rising US interest rates. A rate hike increases the opportunity cost of holding non-yielding bullion.
Gold investors are likely in a fix since overall sentiment favors the possibility of a rise in price. Market uncertainty is the primary reason for optimism in gold. However, Trump’s plans to increase expenditures could provide a boost to inflation, playing negatively on precious metals (IAU) (SLV). Market growth and stability are negative for haven assets.
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VIX and precious metals
As you can see in the above graph, market volatility could be positive for gold. Gold’s correlation with market volatility, depicted above by the CBOE Volatility Index (or VIX), was high in 4Q16 when the Fed raised the interest rate for the first time in almost a decade.
The overall political environment has a significant influence on precious metals and mining companies. The stance that Trump takes could dictate the direction of gold and its peers going forward.