How Closely Is Gold Watching the Fed?

Federal Reserve indications

Precious metal movements have been primarily determined by the Federal Reserve’s indication of a probable interest rate hike in December. During the FOMC (Federal Open Market Committee) meeting in September, many officials showed interest in another rate hike in 2017—and more in 2018.

But interest rate hikes are negative for precious metals as they are non-yield bearing assets. The higher the cash flows offered on Treasuries, the lower the demand for metals like gold and silver.

How Closely Is Gold Watching the Fed?

Inverse relation

The above chart shows how gold (IAU) is inversely related to the US two- and ten-year rate of interest (SHY) (IEF). When the Fed hikes interest rates, gold declines.

However, a rebound in prices may be expected in the long run. Some policymakers are concerned about low inflation levels and are watching the economic numbers that influence the speed of rate hikes.

San Francisco Fed President John Williams, for example, mentioned at an event in Utah that the US central bank should gradually increase interest rates over the next two years, bringing the federal funds rate to 2.5%.

Notably, precious metals briefly fell on Wednesday, October 11, as the September FOMC minutes were released, but prices rebounded on Thursday. The miners that have maintained a downward trend include B2Gold (BTG), Goldcorp (GG), New Gold (NGD), and Gold Fields (GFI).