How the Fed Controls the Price of Precious Metals
Janet Yellen and a rate hike
As we saw in the previous part of this series, fluctuations in the prices of precious metals depend largely on the direction of US interest rates. On Friday, March 3, 2017, Federal Reserve chair Janet Yellen indicated that the Fed may hike the interest rate in March.
In the past week, Fed members have been leaning toward a sooner-than-later interest rate hike. That sentiment gives a positive push to the US dollar and the US Dollar Index (or DXY), which tracks the dollar against a basket of six major world currencies. The DXY rose about 1.7% during the past 30 trading days.
A stronger dollar is negative for precious metals since the metals are greenback-based assets. The higher the dollar surges, the lower the demand for dollar-based assets, since investors from other countries have to shell out more of their local currency to buy a dollar.
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Gold gets kicked from both sides. A stronger dollar and a higher interest rate both pose a threat to gold.
Correlation between gold and the dollar
The correlation between gold (GLD) and the DXY (UUP) is currently at -0.59. That means that about 59.0% of the time, gold and the dollar move in opposite directions. Silver’s correlation with the DXY is also about -0.59.
Precious metals have fallen over the past few days, and so have precious metal mining stocks. Yamana Gold (AUY), Iamgold (IAG), Eldorado Gold (EGO), and Newmont Mining (NEM) have all fallen in the past few days due to the fall in precious metals.