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
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.
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.