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Haven Demand for Gold Sees a Resurgence—What about the Rate Hike?

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Part 2
Haven Demand for Gold Sees a Resurgence—What about the Rate Hike? PART 2 OF 5

Is the Interest Rate Hike Certain Enough to Pull Gold Down?

Rate hike fears

Precious metals investors are carefully watching the overall market sentiment. The performance of the economy will likely determine the course of interest rate hikes by the Federal Reserve.

Precious metals have slumped over the past few trading days due to rising fears surrounding an interest rate hike. Gold, silver, platinum, and palladium have fallen 1.8%, 4.7%, 3.8%, and 2.4%, respectively, on a trailing-five-day basis.

Is the Interest Rate Hike Certain Enough to Pull Gold Down?

Is the Interest Rate Hike Certain Enough to Pull Gold Down?

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The rise in the rate of interest offered on US Treasuries often negatively impacts precious metals, as they’re non–yield-bearing assets. The higher the intermediary cash flows provided on US Treasuries, the lower the demand could be for metals such as gold and silver.

Certainty of a rate hike

The above chart is a depiction of the performance of gold against US two- and ten-year rates of interest. As we see the rate peaking, gold is shown in doldrums. Further interest rate rises could be negative for gold. The rising risk in the market could, however, buoy precious metals.

The upcoming meeting of the Federal Reserve on March 15, 2017, has captivated investors’ interests. A liftoff seems certain, with nearly all analysts affirming the probability of a rate hike.

Miners and funds lost

The fall in gold has led to a slump in precious metals mining funds such as the Sprott Gold Miners ETF (SGDM) and the iShares MSCI Global Gold Miners ETF (RING). These two funds have fallen 5% and 3.3%, respectively, in the past 30 trading days.

The mining shares that have also fallen in the past month include Yamana Gold (AUY), Randgold Resources (GOLD), Pan American Silver (PAAS), and Franco-Nevada (FNV).

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