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

How the Rate Hike Phenomenon Impacted Gold


Aug. 18 2016, Published 9:12 a.m. ET

The Fed’s stance

The Federal Open Market Committee meetings and the monetary policy decisions of the major world’s major economy impact the precious metals significantly. The safe-haven appeal of these metals comes into play when there is economic instability. Although the weaker economic numbers from the country buoyed the precious metals, the metals were negatively impacted by New York Fed (Federal Reserve) President William Dudley’s comment that an interest rate hike may happen as early as September.

The precious metals are non-yield-paying assets. Thus, the higher the rates offered on Treasuries, the lower the value of these assets. The opportunity cost of holding gold rises when the Treasuries start paying greater yields.

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Interest rates versus gold

The chart above compares ten- and two-year Treasury rates with gold’s price movement. Traders see a 55% chance for the Fed to raise rates in December. The probability increased from 42% on Monday.

Most of the precious metal miners fell on Tuesday due to the speculation about the upcoming Fed meeting. Among major mining shares, Newmont Mining (NEM), Coeur Mining (CDE), and Goldcorp (GG) retreated 1.4%, 1.2%, and 0.05%, respectively, on Tuesday. Together, these three miners contribute about 13.5% to the VanEck Vectors Gold Miners ETF (GDX).

The SPDR Gold Shares (GLD) rose 0.49% on the same day. The holdings of the fund rose 0.19% to 962.23 tons on Tuesday. The iShares Silver Trust (SLV) fell 0.05%.


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