US interest rates
Investors were somewhat pessimistic about gold during the last quarter of 2016. Most of the fluctuations were due to the news of the interest rate hike that circulated across the market. The higher interest rate hurts the allure of precious metals. They don’t offer interest or any intermediary cash flows.
The following chart compares the price of gold to the US two and ten-year interest rate offered on Treasuries. The higher the rates offered on the US Treasuries, the higher the demand for that country’s currency. The rising US dollar is also harmful to US dollar-based assets.
During 2015 when the US interest rates rose after almost a decade, precious metals suffered, especially gold. Similarly, gold fell nearly 8% during November due to expectations of an interest rate hike. December witnessed another hike. As a result, gold and other precious metals retreated.
Gold and silver-based funds such as the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV), which have closely followed precious metals, fell during the last quarter of 2016. Assets in GLD, the world’s largest gold-backed ETF, fell to 823.4 tons on December 27. The holdings fell about 13.0% after Donald Trump won the US presidential election.