How the Fed Is Playing on Gold and Related Assets at the End of May



Another liftoff?

Much of the attention on precious metals is focused on the US Federal Reserve’s decision to keep hiking the interest rate in 2017. Fed officials are closely watching the economic numbers coming out of the US. These numbers can give clues as to the economic performance of the country, which, in turn, can determine for the Fed whether the time is right for further another interest rate liftoff.

According to Fed fund futures, there’s a 75% chance of another interest rate hike in the next policy meeting, which is scheduled for June.

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Gold versus interest rates

Remember, precious metals can be highly sensitive to rising US interest rates (IEF) (SHY), which increase the opportunity costs of holding non-yielding precious metals.

Another interest rate hike could be a bad thing for gold, though the rising risk in markets could still boost precious metals. At the same time, the higher the intermediary cash flows provided on US Treasuries, the lower the demand could be for metals like gold and silver.

To be sure, rises and falls in gold are often followed by precious metal funds like the SPDR Gold Shares (GLD) and the iShares Silver Trust (SLV), which have risen 8.7% and 6.9%, respectively, on a year-to-date basis.

Any rise or fall in the precious metals can also substantially impact mining shares like Goldcorp (GG), Alacer Gold (ASR), Harmony Gold (HMY), and Alamos Gold (AGI).


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