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Will a Gradual Hike in Rates Lead to Gradual Fall in Gold?

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Feb. 16 2017, Published 12:10 p.m. ET

A gradual hike

As mentioned in our earlier article, Yellen’s comments indicated that we could likely see a rate hike in upcoming meetings. She did say “upcoming meetings,” rather than “meeting,” so a rate hike in March may or may not happen. She also emphasized that the Fed will hike rates gradually.

Precious metals are non-yield-paying assets, and their price suffers from an increase in interest rates because the opportunity cost of holding gold gets higher with higher yields (JNK) (BND). So even though the pace of the rise may be gradual, it may continue to negatively impact gold (GLD).

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Uncertainty around Trump administration

Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, mentioned that the US may have to raise rates sooner as the uncertainty about the Trump administration may force the central bank’s hand.

The uncertainty surrounding the Trump administration has led to a rise of almost 10% for gold since its ten-month lows in December 2016. The funds flowing to gold-based GLD rose on Monday by nearly 0.5% and touched 840.9 tons.

The fluctuations in the precious metals are often replicated by the precious metal mining shares like Kinross Gold (KGC), Harmony Gold (HMY), Alacer Gold (ASR), and Eldorado Gold (EGO). These shares saw a gain of 17%, 12.2%, 23.1%, and 9.4%, respectively.

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