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

How Much Does the US Interest Rate Influence Gold?


Dec. 4 2020, Updated 10:53 a.m. ET

The data-dependent Fed

After the Fed funds rate announcement on September 21, 2016, Fed chair Janet Yellen said that much of the movement in interest rates offered on Treasuries remained dependent on economic numbers such as CPI (Consumer Price Index), employment, and housing starts.

The rate of interest in the United States as well as many other countries invariably takes a lot from these figures. The important thing about gold and these numbers is that they connect by way of interest rates. Gold and interest rates have a close inverse relationship. The higher the rate offered on Treasuries, the lower the demand for non-yield-bearing assets such as gold and silver.

The above graph is an interpretation of the relationship between gold and the two-year and ten-year rate of interest for U.S. Treasuries. The price of precious metals suffered in December 2015 when the rate of interest rose for the first in almost a decade.

The dovishness of the Fed added to the overall Bank of Japan’s dovishness. The Bank of Japan said it would continue quantitative easing until inflation exceeds 2%, effectively strengthening its commitment to continue aggressive easing.

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Miners rise

The softer tone from major economies of the world helped precious metals and their funds such as the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV).

Mining companies that were among the top performers after the Fed’s dovish stance include Harmony Gold (HMY), Royal Gold (RGLD), Alamos Gold (AGI), and First Majestic Silver (AG). These companies together contribute about 7% to the price changes in the VanEck Vectors Gold Miners ETF (GDX).


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