How Did Rate Hike Fears Move Precious Metals?



Interest rates

Gold futures for February expiration slipped 0.3% and traded at $1,155.2 an ounce. Spot gold was also trading low initially before it inched back up as the day ended. The other three precious metals saw a mixed reaction as the interest rate soared and the markets digested the hike. Silver rose 0.9%, while platinum also rose 0.4%. Palladium, however, dropped 0.3%. So far in 2016, palladium is the best-performing asset year-to-date. However, at the start of the year, it had underperformed its peers.

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Besides the fluctuations in precious metals, precious-metal-based funds like the iShares Silver Trust (SLV) and the SPDR Gold Shares (GLD) also have been suffering due to expectations of a rate hike. SLV and GLD have lost 6.3% and 8.2%, respectively, over the past one month due to fears the Fed would hike rates.

Reducing fund flow

GLD and SLV have lost significant cash flow over the past one month. GLD saw an outflow of $2.9 billion during one month, while SLV also lost $246.3 million during the past one month. The world’s largest gold fund, the SPDR Gold Trust (GLD), was down approximately 1.5% on Wednesday.

It seems likely that the expectation of an interest rate hike had been priced into gold. Due to the already priced-in hike, the downside from the decision may be limited. However, gold certainly felt the impact of the hawkish comments.

Mining stocks that have also been negatively impacted by the rate hike phenomenon include Alacer Gold (ASR), Randgold Resources (GOLD), Yamana Gold (AUY), and Eldorado Gold (EGO).

In our next article, we’ll discuss Yellen’s comments along with the relationship between gold and interest rates.


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