uploads///Gold price versus US Ten year Treasury yield

US Consumer Prices Fanned Fed Concerns and Buoyed Gold


Jan. 22 2016, Updated 5:31 p.m. ET

Weak economic data

The CPI (Consumer Price Index) data that came out on Wednesday, January 20, likely made the Federal Reserve question the pace of its interest rate hikes. Consumer prices fell about 0.1% in December 2015 compared to the previous month though the markets expected the prices to be unchanged from the previous month. However, year-over-year, consumer prices were 0.7% higher from the December 2014 figures, which were below expectations for a 0.8% increase. The housing starts fell 2.5%. The annualized number of new residential buildings that began construction during the previous month stood at 1.15 million compared to the expected 1.2 million.

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Fed decision

Such weak numbers likely raised concerns for the Fed about the pace that it had predicted for raising the interest rates. A weaker economy weighs negatively on the dollar, thus pushing the dollar-denominated gold higher. Another sign of this is the prevailing weakness in the markets because investors are fleeing to safety, which is taking gold higher.

The Fed’s decision to raise interest rates caused gold to lose its luster as evident from the chart above. A primarily inverse relationship exists between gold and interest rates. Gold rose 1.6%, and silver rose about 0.3% on Wednesday. The gain in precious metals also lifted up the mining shares like Coeur Mining (CDE), Agnico-Eagle Mines (AEM), and Yamana Gold (AUY). These three shares rose 4.6%, 0.34%, and 4.3%, respectively, on Wednesday. Together the three companies make up 9.6% of the price changes in the VanEck Vectors Gold Miners ETF (GDX). The VanEck Vectors Junior Gold Miners (GDXJ) and the iShares Silver Trust (SLV) also followed the gains in precious metals.


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