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Will Interest Rates Continue to Dominate Fluctuations in Gold?

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The Fed’s next meeting

Among the four precious metals, silver has been the worst-performing metal over the past month. Silver (SLV) carefully reacts to gold (IAU), and as silver is extensively used as an industrial metal, industrial market sentiment can play a hand in its performance. Silver ended May 1 at $16.8 per ounce, which is its lowest level since January 2017.

One crucial factor that is playing on precious metals now is the upcoming two-day policy meeting of the US Federal Reserve and the stance that it could take during the meeting toward future interest rate hikes.

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Yield or no yield?

The Fed’s decisions and precious metals—especially gold—are closely linked to one another. Any rise in the yield can cause the allure of gold to dull, as gold offers no intermediary cash flows. The higher the interest being offered, the more investors tend to park their money in yield-bearing assets rather than in gold.

Another liftoff move by the Fed could thus cause a fall in gold, just as we saw in December 2015, when the interest rate was hiked for the first time in a decade. US Congressional negotiators are meanwhile trying to hammer out a bipartisan agreement on a spending package to keep the federal government funded through September, and this could have also been elemental in the fall in precious metals on May 1.

Notably, Harmony Gold (HMY), IAMGOLD (IAG), Alacer Gold (ASR), and Cia De Minas Buenaventura (BVN) lost 5.1%, 4.8%, 2.3%, and 3.3%, respectively, on Monday, May 1. Combined, these four miners make up about 6% of the VanEck Vectors Gold Miners Fund (GDX).

In the next part, we’ll examine correlation trends.

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