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Are Monetary Policies Playing on Precious Metals?



Monetary policy

Precious metals have witnessed downward pressure over the past few months due to the expectation that US monetary policy is on a tightening path. Central banks in Europe and elsewhere also seem to be moving away from ultraloose monetary policy. Combined, these factors have put substantial downward pressure on precious metals.

The tightening of the economy by way of rising interest rates is negative for precious metals because they’re non-yield-bearing assets. The higher the interest rate surges, the more likely it is that investors will choose yield-bearing havens such as Treasuries over precious metals, which pay no intermediary cash flows.

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Interest rates versus precious metals

However, because precious metals have already taken a beating from rising interest rates, many analysts believe that much of the fall in precious metals has already been priced in. There’s the chance that the market’s uncertainty could give an upward push to precious metals.

The negative sentiment in precious metals due to the rate hike phenomenon has also extended to precious metals over the past few months. Mining shares such as Alamos Gold (AGI), AngloGold Ashanti (AU), Alacer Gold (ASR), and Aurico Gold (AUQ) have seen trailing-30-day losses of 3.2%, 4.7%, 10.6%, and 15.1%, respectively. However, most miners have revived and have seen 30-day rises.

As the chart above shows, gold (SGOL) and the US two- and ten-year rates of interest (SHY) (IEF) are diverting from each other and showing inverse relationships.


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