How Interest Rates Played on Gold in 1Q17
Rate hike and gold
Many of the fluctuations in precious metals and precious metal funds were fear-driven in 1Q17. But a hefty portion of the price changes were brought on by the Federal Reserve’s decision to hike the interest rate.
The Fed raised the interest rate in March, which increased pessimism for precious metals. But soon after the rate hike, precious metals started reviving. Recently, Federal Reserve members were asked their opinions about more interest rate hikes this year. Read Understanding the Stake of Fed Sentiment in Gold to see how they responded.
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The above graph shows the performance of gold (GLD) plotted against the US two-year and ten-year interest rates (SHY) (IEF). Precious metals are non-yield-bearing assets and thus pay no intermediary cash flows like Treasuries. The higher the yield offered on Treasuries, the lower the demand for non-yield bearers.
Investors are also closely watching the US economic numbers and the upcoming Fed meetings that could determine how many hikes are expected throughout the rest of the year. These factors could substantially impact gold, its funds, and its miners.
Miners that outperformed
Despite an interest rate hike in the first quarter of 2017, mining shares that have been outperformers compared to their peers include Alacer Gold (ASR), Centamin (CEY), Rio Tinto (RIO), Sibanye Gold (SBGL), and Centerra Gold (CG). They rose 20.1%, 24.7%, 23.4%, 24.8%, and 21.6%, respectively, in 1Q17.