Gold prices under pressure
The expectation of the Fed rate hike is an important factor that is having a huge impact on gold price dynamics right now. The Fed has a dual mandate of maximum employment and stable prices, or 2% PCE (personal consumption expenditure). Any factor that seems to contribute favorably to that mandate fuels a sell rally in gold, and vice versa.
Interest rates have been near zero since 2008. An interest rate hike would be negative for an asset not yielding any income. It leads investors to better interest-yielding asset classes such as equities and bonds.
A rate hike would be negative for gold prices (GLD) and gold stocks, including Goldcorp (GG), Yamana Gold (AUY), and Agnico Eagle Mines (AEM). AEM forms 5.0% of the VanEck Vectors Gold Miners ETF (GDX).
As we’ve seen in the previous parts of this series, some recent US economic data has missed expectations. However, it is still doing better than most of the other developed countries. More negative data could defer the Fed rate hike, which would be positive for gold.
Investors should keep an eye on indicators that might lead to the Fed hiking interest rates sooner rather than later. This includes labor market indicators, inflation data, inflation expectations, and general economic indicators that show the health of the US economy and the sentiment of the country’s consumers.