Economies Look at Lower Interest Rates to Support Gold



Loosening economy

Overall economic sentiment across the globe seems bearish as equities have been plunging since the start of 2016, driven by the oil rout. Recent oil prices have retreated to multiyear lows alongside the shock waves that the world second-largest economy, China, has sent toward financial planners.

Meanwhile, Japan has sought to decrease its interest rates into negative territory. The move is likely to help the economy out of the deflationary phase that it has been trying to escape for a long time. The ECB (European Central Bank) has also pushed toward a more dovish sentiment and has thus been keen on monetary expansion. This may also adversely impact the US Federal Reserve’s rate hike decisions throughout 2016, though there are mixed opinions on the course the Fed should take. Kansas City Federal Bank President Esther George, for example, has said that the Fed should push ahead with interest rate hikes because of the strong fundamentals of the US economy.

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All that said, we should remember that precious metals have a close inverse relationship with interest rates. Low rates boost the appeal of haven assets like precious metals, as they pay no cash flows, while higher rates cause money to flow to interest-bearing assets like Treasuries, rather than gold or silver.

Gold soars

The recent surge in precious metal prices in 2016 come as a result of the unrest across global markets. Gold futures have gained by 6.4% since the start of the year, and silver has gained by 3.7% on the same basis. Gold- and silver-based investments like the iShares Gold Trust (IAU) and iShares Silver Trust (SLV) have also gained by about 6.6% and 3.32%, respectively, on a year-to-date basis.

Mining-based stocks that have recently soared include Newmont Mining (NEM), Randgold Resources (GOLD), and AngloGold Ashanti (AU). These three stocks have gained by 11.6%, 17.1%, and 21.7%, respectively, on a 30-day trailing basis. Together, the three stocks make up 14.8% of the price changes in the VanEck Vectors Gold Miners ETF (GDX). GDX has climbed by 4.2% during the same time frame.

Now let’s look at the recent relationship between gold and the US dollar.


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