uploads///Gold versus Two and Ten Year Interest Rates

Could Negative Interest Rates Impact the US Economy and Gold?


Mar. 3 2016, Published 12:23 p.m. ET

Best-performing commodity

Gold has been the best-performing commodity in 2016 so far. Out of the 24 commodities listed on the S&P GSCI (Goldman Sachs Commodity Index), gold is the top performer and silver occupies fourth place. The tumult in the global market has helped precious metals as they were lifted on haven bids.

Gold and silver have gained 17.1% and 8.3%, respectively, during the past two months. Gold was trading at $1,241.80 per ounce and silver was trading at $15.10 per ounce as of Wednesday, March 2, 2016. The rise in precious metals can also be depicted by investments in precious metal–backed funds like the iShares Gold Trust ETF (IAU) and the iShares Silver Trust ETF (SLV).

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Negative interest rates

One of the crucial factors impacting precious metals is the future course that the Federal Reserve policy-setting committee could take regarding the hike in interest rates. Gold, along with the other precious metals, has a close inverse relation to the US yield. Precious metals bear no interest, so rising rates pose a threat to these non-interest-bearing investments. This typically causes them to retreat, which we saw in mid-December 2015.

Big economies are looking at negative interest rates to give a boost to their drowning economic markets. Europe and Japan are among the economies looking at below-zero rates. This creates a conundrum for the world’s largest economy, the US.

Whether the US should further hike its rates as previously decided, or whether it should consider lowering the rates further under the influence of the global economic turbulence, should to a great extent determine the price movements of gold and the mining stocks as well.

Mining-based companies that to a large extent depend on the price of precious metals for their price changes include GoldCorp (GG), Eldorado Gold (EGO), and Kinross Gold (KGC).


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