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Why the Fed’s Rate Hike Hesitation Is Helping Gold


Mar. 17 2016, Updated 1:54 p.m. ET

Inflation and gold

As the global uncertainties have gripped the major economies of the world, most assets have lost their attractiveness to investors. Only gold’s allure remains, and we’ve seen a rally in precious-metal-based funds and other related investments.

The Federal Reserve remained shy about a rate hike owing to the downward sticky inflation numbers that fail to give muscle power to the central government. While the inflation numbers run below the target 2%, the personal consumption expenditures index rose 1.3% in January year-over-year. The core inflation increased 1.7%, but the prospects for the same measure remain unchanged. The GDP (gross domestic product) growth expectations have also dropped since December.

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Due to the above reasons, the Fed is now only eyeing two quarter-point rate hikes in the current year compared to the previously considered four rate hikes in 2016. Above is a chart that shows the longer-term relationship between the gold price and the inflation number depicted here by the US ten-year break-even rate. The US Treasury ten-year break-even rate is the spread between the ten-year Treasury yield and the ten-year inflation-protected security yield.

Gold-related investments

Market expectations for a June rate hike are split with the majority of traders predicting at least one rate hike by the end of the year. The odds of an interest rate increase in June fell from 54% to 38% on Tuesday, March 15. The delay in the downward shift of the interest rate has helped precious metals even more.

The rise in gold also helped funds like the VanEck Vectors Junior Gold Miners ETF (GDXJ) and the leveraged Direxion Daily Gold Miners ETF (NUGT). These two funds saw gains of 8% and 20.3%, respectively, on Wednesday, March 16. The top mining performers on Wednesday include Cia De Minas Buenaventura (BVN), Primero Mining (PPP), and B2Gold (BTG). These three companies soared 11.1%, 12.5%, and 11.9%, respectively. Together, the three companies make up 5.7% of the VanEck Vectors Gold Miners ETF (GDX).


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