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What Could Help Gold Make a Comeback in 2017

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Part 4
What Could Help Gold Make a Comeback in 2017 PART 4 OF 12

How the Interest Rate Outlook Affects Gold

Fed hikes

One of the most important factors determining the outlook for gold has been the Fed’s interest rate trajectory. While the Fed acknowledged that the first quarter’s growth was slow, it views it as transitory. It expects economic activity to expand at a moderate pace and labor market conditions to strengthen with gradual fiscal tightening. Despite the recent weakness in inflation, the committee sees it as “running close” to their target.

How the Interest Rate Outlook Affects Gold

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The Fed sees two more rate hikes in 2017. The next policy meeting will be on June 13 and 14. The market is gearing up for the second hike of 2017 in June. The Fed’s affirmation led to precious metals retreating and the US dollar strengthening against other currencies.

Fallout for gold

When weak inflation is expected, real interest rates tend to rise, which is clearly negative for gold and other precious metal prices. Recall that higher rates encourage investors to park their money in interest-bearing assets instead of non-yield bearers such as gold. Higher real interest rates are negative for funds such as the VanEck Vectors Gold Miners ETF (GDX). Gold’s 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). If you’re interested in making directional plays on interest rates, you may be interested in the iShares 20+ Year Treasury Bond ETF (TLT).

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