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How Gold Reacted to the Instability of the Markets in 2016


Jan. 4 2017, Published 1:32 p.m. ET

Instability and gold

As gold sank during the last part of 2016, many analysts expect a rebound to be around the corner. However, the rebound could be a temporary one, depending on the direction in which the overall economic atmosphere tilts.

The price of gold usually surges higher as instability in the market increases. Although gold and volatility typically track each other, the chart below shows that they can also deviate.

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Interest rate hike fears

During the last two years, gold has been mostly dependent on US interest rates. Much of the downfall in precious metals occurred before the December interest rate hike took place. Gold slumped almost 7% in November due to widespread fear of rising interest rates. The higher interest rates climb, the lower is the demand for non-yield-bearing assets like gold and silver. The opportunity cost of gold rises with a hike in interest rates.

Hedge funds and money managers cut their net long positions in gold to a nearly 11-month low and trimmed bullish bets in silver contracts in the week ended December 27, 2016. The SPDR Gold Trust ETF (GLD), the world’s largest gold-backed exchange traded fund, saw its holdings fall 0.14% to 822 tons on December 30, 2016, compared to December 29.

Due to tumbling precious metal prices, the funds based on these metals, such as the SPDR Gold Shares ETF (GLD) and the iShares Silver Trust ETF (SLV), also suffered during the last quarter of 2016. Mining stocks like Alacer Gold (ASR), New Gold (NGD), First Majestic Silver (AG), and Alamos Gold (AGI) also saw their prices fall during the same timeframe.


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