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

Gold Keeps a Close Watch on the Interest Rates

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Nov. 21 2016, Published 12:11 p.m. ET

Treasuries and gold react

As the market sentiment is being gripped by moves that Donald Trump could make, US bond yields were set for their biggest two-week rise in about 15 years on November 18. The bets on US inflation and the interest rates are rising. Yellen’s comments on Thursday couldn’t help the hopes of the interest rate hike happening sooner. Investors are pricing high chances for the December interest rate hike—exactly a year after the rate rose for the first time in a decade.

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Opportunity cost

The opportunity cost of holding the precious metal is negatively impacted with the hike in the interest rate offered on Treasuries. Treasuries and precious metals are favored during times of uncertainty because they’re safe-haven assets. With the rise in interest, gold’s lure decreases.

The combination of the rising US dollar and rising yields isn’t playing well for precious metals. Even copper and nickel have been treading water.

Fluctuations in gold’s price over the past few months have been based on the Fed’s stance regarding an interest rate hike. Gold is negatively impacted by rising interest rates offered on Treasuries.

In the above graph, you can see the comparative performance of gold alongside US ten-year and two-year interest rates. For the first time since January 2016, 30-year Treasury yields exceeded 3%. They were at an 18-month high.

Miners and funds

Now, analysts keep a close eye on the Fed’s upcoming meeting. Analysts also watch reviews that Fed members give about the economy for more indications on gold and other precious metal prices. Mining-based funds such as the Sprott Gold Miners (SGDM) and the Global X Silver Miners ETF (SIL) tend to take direction from the Fed’s stance.

Mining stocks also seem to be dependent on gold, although they can diverge at times. Companies like Pan American Silver (PAAS), Kinross Gold (KGC), Alamos Gold (AGI), and Eldorado Gold (EGO) saw falling returns in the past few months due to the fall in precious metals.

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