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How the Fed Rate Hikes Could Affect Gold Miners

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Fed hikes interest rates 

The FOMC (Federal Open Market Committee) raised the federal funds rate 0.25% to 0.75%–1% on March 15, 2017. This is the first increase this year and the second increase in the last three months. The markets had almost fully anticipated the hike after receiving clear signals from Fed officials. The US inflation and employment numbers were particularly supportive of the rate hike, so the market participants welcomed the news. Most US indexes reacted calmly and ended on positive notes.

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The Fed and gold

Gold usually sees negative effects from higher interest rates for two primary reasons. Gold’s non-yield-bearing nature helps alternative assets generate income. Plus, strength in the US dollar affects commodities like gold that are pegged to it.

Because gold had already priced in the hike and much tighter monetary policy going forward, a relatively dovish commentary was soothing to gold prices. Gold ETFs rose after the hike decision came out, and the SPDR Gold Shares ETF (GLD) rose 1.9%.

This exuberance was also reflected in miners’ stock prices and ETFs. The VanEck Vectors Gold Miners ETF (GDX) soared 7.7% while the VanEck Vectors Junior Gold Miners ETF (GDXJ) rose 11.5%. Harmony Gold (HMY), IAMGOLD (IAG), Yamana Gold (AUY), and First Majestic Silver (AG) rose 11.2%, 14.5%, 9.5%, and 9.7%, respectively.

For a detailed analysis on which stocks could underperform or outperform in a higher interest rate scenario, read Finding Investment Opportunities in Gold after the Rate Hike.

A second major development took place in the form of the failed healthcare bill. In the next part, we’ll see what repercussions the failure had on the precious metals and mining sector.

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