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Precious Metals: Why Investors Are Waiting until September 17

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Gold and the interest rate hike

With the growing anticipation of the interest rate hike by the Fed, all eyes are set on its relative impact on investors’ portfolios. Specifically, investors are watching the investments in gold—a safe-haven asset. Gold is the most actively traded contract on COMEX—the commodity division of NYMEX. For December delivery, it fell 0.50% and closed at ~$1,103 per ounce on Friday, September 11, 2015. The rate hike will likely determine the downfall.

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Gold fell to its five-year low in July as the rate hike expectation continued hovering over investors’ heads. As an investment, gold might struggle if the interest rates see upward movement. Gold could become less appealing as an asset. It doesn’t give interim returns like Treasuries and equity. With a rise in the interest payments by banks, investors may flock to these interest-bearing assets. They might leave gold behind. This would cause its downfall.

Hawkish or dovish?

The Fed has been signaling that it’s getting closer to a liftoff after a decade. This move is in the wake of the stabilizing economy that’s gathering steam. Whether the FOMC (Federal Open Market Committee) policy setting meeting on September 16–17 is hawkish or dovish will decide the direction for precious metals. However, whether the liftoff takes place in September, December, or even beyond that remains a mystery until the meeting.

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Other precious metals and ETFs

Silver futures on COMEX for December delivery also performed almost in line with gold. It gave a 0.41% return on Friday, September 11 and settled at $14.59 per ounce. Gold has almost buoyed in the past month. It fell marginally by 0.45% on a 30-day trailing basis. However, silver fell ~5.20% on a 30-day trailing basis. Platinum and palladium also fell on a 30-day trailing basis due to the Fed’s rate hike expectations falling 2.65% and 1.46%, respectively.

Leveraged ETFs like the Direxion Daily Gold Miners 1 (NUGT) and the Direxion Daily Junior Bull Gold 3X ETF (JNUG) fell 36% and 32%, respectively, on a 30-day trailing basis. However, the Direxion Daily Junior Gold Bear 3X ETF (JDST) rose ~7% on the same basis.

Fed’s meeting impacts miners

The FOMC (Federal Open Market Committee) meeting will impact the four precious metals mentioned above. The changes in the prices of theses metals will impact mining equities as well. Companies like Kinross Gold (KGC), Yamana Gold (AUY), and Sibanye Gold (SBGL) have seen losses on a YTD (year-to-date) basis. These three companies have lost about 60%, 79%, and 38% on a YoY (year-over-year) basis due to the fall in gold prices. Together, they account for 9.50% of the VanEck Vectors Gold Miners ETF (GDX).

In the next part of this series, we’ll discuss the effects on bullions if the Fed delays the rate hike.

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