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If There’s an Interest Rate Hike, How Could Gold Be Affected?

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The dollar and interest rates

As December approaches, discussion of a potential interest rate hike is growing. A hike is of particular concern to market participants because it could affect equities, currencies, and commodities. A higher interest rate for US Treasuries usually causes investors to move their money to the United States, raising demand for the dollar and reducing demand for safe-haven assets such as gold.

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Fed officials’ views

The above chart compares changes in gold prices and US two- and ten-year interest rates (SHY) (IEF). According to Reuters, “San Francisco Fed President John Williams reiterated his view on Thursday that the U.S. economy is growing strongly enough for the Fed to continue raising rates gradually over the next couple of years to around 2.5 percent.” The Reuters report added that “Cleveland Fed President Loretta Mester said on Thursday she feels inflation is poised to pick up, clearing the way for the Fed to continue its gradual process of raising interest rates.”

Investors will be closely monitoring US economic numbers for further direction on interest rate movement. Higher rates could also affect precious metal funds such as the SPDR Gold Shares ETF (GLD) and the iShares Silver Trust ETF (SLV), which fell 1.3% and 2%, respectively, on Monday. Mining stocks Harmony Gold (HMY), Alacer Gold (ASR), Eldorado Gold (EGO), and IAMGOLD (IAG) fell 2.7%, 1.8%, 3.2%, and 1.4%.

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