How the Fed’s Recent Actions Impact the Precious Metal Industry
Rebound in precious metals
Precious metals witnessed a rebound in their prices on Wednesday, July 12, 2017. Gold, silver, platinum, and palladium increased 0.36%, 0.9%, 2.2%, and 1.7%, respectively. However, gold, silver, and platinum prices have fallen over the past 30 trading days.
In our view, the rise in these metals could be due to the decline seen in some interest rates. When the US ten-year rates dropped to 2.31%, this may have been a catalyst for the rise of precious metals. Wednesday, July 12, was the third straight day of declines of the ten-year yield.
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Precious metal prices and Treasury rates are inversely related to each other. The higher Treasury rates rise, the lower would be the demand for non-yield-paying assets like gold and silver (SLV). Treasuries and precious metals are well-regarded as safety-providing assets. Their demand usually surges during rising unrest in the market.
The Federal Reserve
The chart above depicts how gold (IAU) has been moving over the past two years in accordance with US two-year and ten-year interest rates (IEF) (SHY). The inverse relationship between the two is evident.
When the Federal Reserve chair, Janet Yellen, presented her testimony on July 12, she reiterated that further increases were likely warranted. This could be negative in the long run for precious metals.
Lael Brainard, a member of the U.S. Federal Reserve’s Board of Governors, expressed her preference for starting to shrink the balance sheet soon. She also expressed relative cautiousness over increasing interest rates. Investors may not expect a rate hike before December 2017.
Mining stocks saw a mixed performance on Wednesday, July 12. First Majestic (AG) and B2Gold (BTG) fell 0.9% and 1.1%, respectively. New Gold (NGD) and Newmont Mining (NEM) rose 1.7% and 0.67%, respectively, for the day.