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How the Interest Rate Hike Is Playing on Precious Metals

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The yield play

Another element besides the fluctuations of the US dollar that could have led to the fall in precious metals is the US interest rate. The Fed has kept investors on their toes with the rise in interest rates playing on the equity market slump. That, in turn, has impacted global equities. Asian equities were trading close to their six-week lows on Thursday.

The Fed has indicated that hikes in interest rates could continue at a steady, gradual pace. John Williams, president of the Federal Reserve Bank of San Francisco, said on Wednesday that bond traders are pricing a faster-rising inflation. That could lead to interest rate hikes, which would have a negative impact on precious metals since they’re non-yield assets.

Gold and the interest rate

The above chart prices the US two-year and ten-year rates of interest (SHY) (IEF) against gold prices.

Since gold and other precious metals bear no intermediary cash flows, the higher interest rate offered on Treasuries causes the demand for gold to deteriorate. Therefore, the recent rout in precious metals could have been ignited by the rise in yields.

The iShares Gold Trust (IAU) and the iShares Silver Trust (SLV), which are gold- and silver-based funds, have fallen 1.3% and 1.7%, respectively, over the past five trading days.

Mining shares that have also fallen over the past week are Sibanye Gold (SBGL), Gold Fields (GFI), Randgold Resources (GOLD), and Yamana Gold (AUY). They’ve fallen 9.2%, 8%, 16.4%, and 6.1%, respectively, on a five-day trailing basis.

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