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What Does the 2-Year Yield Say about Precious Metal Prices?

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Aug. 13 2015, Published 9:29 a.m. ET

Inverse relation

A good way to study markets is to keep track of the US Treasury security returns. Investors seek Treasuries as a safe haven during financial turmoil and economic instability. These Treasuries are a derivative of the FOMC (Federal Reserve Open Market) decisions on monetary policies and other key economic prospects.

The volatile United States Generic Government Two-Year Yield can give investors some important insight into gold price changes. As seen in the below chart, the two-year yield has been mimicking the tentative interest rate hike. The rate hike speculation is pushing the yields upwards. Thus, the yields are an important economic indicator, as they have an inverse relation to gold.

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Effect on precious metals

On August 7, the gold price rose by 0.36% and settled at $1094.1 per ounce. Similarly, silver increased by 0.98% to $14.821 and platinum gained 0.65%. On the other hand, palladium lost 0.48% on August 7 and a whopping 25.14% on a 30-day trailing basis. The two-year yield settled at 0.729%, ~1.69% higher than the previous day’s close.

Treasury rates under the current scenario can be indicative of the broader market sentiment. Like gold, ETFs including the iShares Gold Trust (IAU), the iShares Silver Trust (SLV), and the Sprott Gold Miners (SGDM) also saw positive returns, gaining 0.38%, 0.86%, and 0.32%, respectively.

Mining companies that went into positive territory as the two-year yields were on the rise include Barrick Gold (ABX), Eldorado Gold (EGO), and Yamana Gold (AUY). These stocks climbed 2.33%, 2.47%, and 3.89%, respectively. ABX, EGO, and AUY together contribute 14.86% to the VanEck Vectors Gold Miners ETF (GDX).

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