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US Rate Hike Could Keep a Lid on Gold in 2016

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Fed weighs on gold

As the price of gold is down almost 9.5% in 2015 so far, the most crucial factor keeping gold under its whip in the past year has been the liftoff of the federal interest rate by the US Federal Reserve. The verdict by the Fed in the last policy-setting meeting for the year on December 17 ended a decade-long era of zero-touch rates.

This gave a push to the US dollar and pulled down gold. Gold is a non–cash-flow bearing asset, and it becomes less appealing amid higher offered rates of interest. Further hikes, though they will likely be gradual, can add to the negative sentiment already prevailing in the precious metals market.

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Asian demand may hold up

Though crushing gold prices have resulted in yearly demand cuts of 25% and 3% in China and India, respectively, the ever-growing love for gold in Asia may buoy its prices in 2016.

India, China, and Russia together make up almost 60% of the world’s demand for gold. The growth concerns in emerging countries coupled with depressing GDP (gross domestic product) figures may also give a boost to gold’s haven appeal. Growing geopolitical tensions worldwide may also give a kick to the appeal of precious metals.

The mining sector, too, has seen carnage in the past year. The coming year may give this sector a breather compared to 2015. Canada-based mining companies Alacer Gold (ASR), Centerra Gold (CG), Rio Alto Mining (RIO), and Agnico Eagle Mines (AEM) have seen year-to-date rises of 13.2%, 24.3%, 76.7%, and 15.1%, respectively.

The coming year may bring miners’ profitabilities back to desired levels if they are willing to consolidate and cut their costs. The above-mentioned four companies make up 7.4% of the VanEck Vectors Gold Miners ETF (GDX).

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