A Look at Gold as the Fed’s Rate Hike Looms
The Fed’s interest rate hike
On December 14, 2016, the Fed finally raised interest rates by 25 basis points. More concerning from an investor’s point of view was the Fed’s targeted total hike of 75 basis points in 2017. The Fed’s first meeting for 2017 is on March 14 and 15. The market is quite certain that it will increase rates at this meeting. Comments from several Fed officials and US economic data in the last few weeks have been supportive of a rate hike.
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Investors should, however, note that due to the growing likelihood of a hike, gold prices have weakened. If the Fed is not able to hike rates for some reason, precious metal prices may see an upward surge.
Impact on 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. The future outlook for gold will also be dependent on the Fed’s outlook for future rate hikes. Pay attention the Fed’s tone regarding the future rate hike trajectory to gauge the direction of gold prices.
Impact on gold investments
Gold prices are expected to remain volatile (VIXY) (VXX) 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). Their weakness will likely be apparent in the prices of miners such as Eldorado Gold (EGO), Kinross Gold (KGC), Alacer Gold (ASR), and Silver Wheaton (SLW).