The dollar connection
Although interest rate hikes and speculation impact precious metals, this effect is typically temporary. However, the dollar has a significant impact on the movement of precious metals. If we look at the historical performance of gold versus the US dollar, there is a marked inverse relationship between the two.
The US dollar (UUP), which is depicted by the DXY Currency Index (or DXY), fell 0.71% on December 13—the day the Federal Reserve raised interest rates a quarter point to 1.25%–1.50%.
Precious metals like gold and silver are dollar-denominated assets that react negatively to the increase in the US dollar. When the dollar surges, international investors find the dollar to be more expensive. As a result, the demand for dollar-priced assets also becomes more expensive.
The inverse relationship between gold and the US dollar is depicted in the chart above.
Gold and silver
The US dollar and yields fell on December 13 after data showed sluggish growth in consumer prices. The weakness of the dollar gave a boost to gold (IAU) and silver (SLV), which rose 0.57% and 1.3%, respectively.
Gold ended at $1,246.90 per ounce, and silver closed at $15.80 per ounce on December 13. The rebound in the dollar could pressure precious metals in the coming days.
Another major event that could impact precious metals is the Republican plan to enact tax cuts, which is intended to stimulate the economy. Historically, a robust economy is a negative factor for precious metals.