Gold Shines Bright in the Low Interest Rate Environment

As the Fed voted against the interest rate rise in the recent two-day meeting, gold futures advanced initially by 2.5%, but ended the day lower. Gold futures for April delivery on COMEX had seen four straight sessions of decline, but instantly saw gains as the rate hike now seems more distant.

Gold is a non-interest, non-dividend bearing asset and its price often surges as the interest rates drop lower. The inverse relationship explains the investor preference of higher yields over non-interest paying gold. If the rates rise as seen during mid-December 2015, gold and gold-related assets could have headed south. The below chart shows the relative price performance of gold with respect to ten-year and two-year US Treasury rates.

Investors remain extremely concerned about the rationality of central banks’ decision making. With Japan and Europe lowering their interest rates, the likely path of US interest rates remains a question amid the global uncertainties.

The turmoil in the financial markets helped boost demand for precious metals. Gold and silver have seen gains of approximately 19.5% and 13.7%, respectively, since the start of 2016. Gold’s rally had been sputtering and had gained support from the lower interest rates around the world.

Gold’s reign as the top-performing asset has also helped funds like the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU). These two funds have closely followed gold and both have gained 18.9%. The mining stocks that earned a fortune include AngloGold Ashanti (AU), Harmony Gold (HMY), and Barrick Gold (ABX).