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The Fed’s Gold Dump

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Federal meeting

One of the most significant factors playing on gold over the past couple of years has been the US Federal Reserve’s interest rate hike phenomenon. Fed members met on May 2–May 3, and markets were anticipating a 69% chance of another rate hike, but many analysts were expecting the Fed not to hike the rate this month.

The Fed acknowledged a slowdown of data through March and April 2017 but mentioned that the first quarter should be transitory. They also seemed to ignore the weak non-farm payroll growth in March by suggesting that the labor market has continued to strengthen.

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It seems likely that the Fed is now in a wait-and-watch mode, as the last hike was only about six weeks ago. The upcoming June meeting promises hope for another interest rate hike this year, however, with the certainty of June hike now at a whopping 94%. This has caused precious metal prices to retreat.

Gold and treasuries

The above chart shows the relationship between gold and the ten-year and two-year rate of interest offered on US Treasuries. The relationship between gold and Treasury rates, to be sure, are inverse, as an increase in rates encourages investors to park their money in interest-bearing assets instead of the non-yield bearers like gold.

Fluctuations in precious metals also bring about changes in gold- and silver-based funds like the SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV), which fell 1.4% and 2.1%, respectively, on Wednesday.

The mining shares that dropped on Friday, April 28, include Silver Wheaton (SLW), Franco-Nevada (FNV), Barrick Gold (ABX), and Pan American Silver (PAAS), which fell 1.5%, 0.96%, 1.2%, and 0.61%, respectively.

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