The Fed and the US dollar
To be sure, August and September have seen rising tensions in North Korea and heightened political uncertainty (VXZ) in Washington. At the same time, the monetary policy changes by the US Federal Reserve have moved precious metals, and these factors have all played on mining funds and stocks accordingly.
The US dollar saw a liftoff after the Fed’s hawkish tone at the latest FOMC (Federal Open Market Committee) meeting in mid-September, wherein we heard more certainty about another interest rate hike in 2017. Remember, the dollar benefits from a rising yield, as more and more investors from the other countries prefer to park their money in higher-yielding US Treasuries.
The above chart depicts the changes in gold (GLD) and the dollar (UUP) with respect to each other.
Market risk sentiment has an inverse relationship with the stock market and a direct relationship with gold, which gives it an inverse relationship with gold and equities.
Often, when investors are opting for higher risk by choosing equities, they discard safe-haven assets like gold and silver. On the other hand, gold and silver buying resurfaces when tensions pile up and stocks underperform.
Notably, mining stocks, while they’re part of the equity sector, are closely associated with precious metals, and so companies such as Primero Mining (PPP), Coeur Mining (CDE), Harmony Gold (HMY), and Alacer (ASR) represent volatile stocks that take directions from gold and silver.
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US equity markets are in the red today amid the escalation in the US-China trade war.