The Fed and gold
Besides the rise and fall of the dollar, another element that was crucial in determining the directional movement of precious metals was the two-day Federal Reserve meeting. Investors have been expecting the Fed to keep the interest rate unchanged, given the unrest in the markets and the weak economic numbers in the past month.
Precious metals and gold are negatively related to each other. When the interest rate is higher for Treasuries, investors opt for yield-bearing assets rather than non-yield bearers such as gold.
An increase in the interest rate also gives wings to the US dollar, which is also negative for precious metals and miners. The graph below is a comparison of the US two-year and ten-year rate of interest (IEF) (SHY) against gold (GLD).
The Fed’s conundrum
A weak inflation outlook and the lack of confidence in US economic numbers may together weigh on the Fed’s decision. Chances that the Fed will hike the interest rate multiple times in 2017 are very bleak, although there’s still a strong possibility of a few rate hikes in 2018.
Just like precious metals, mining shares are also negatively impacted by these factors. Miners such as Primero Mining (PPP), Randgold Resources (GOLD), Harmony Gold (HMY), and Franco-Nevada (FNV) have all witnessed downward determined prices over the past few months, but the last two weeks have brought somewhat of a revival.