uploads///Gold Price Versus US Two and Ten year rate of Interest

Are Interest Rates Moving alongside or against Gold?


Mar. 28 2018, Published 11:07 a.m. ET

The Fed is more dovish

The recent FOMC (Federal Open Market Committee) meeting was more dovish than expected, which gave more breathing room for precious metals. Investors were widely expecting at least three more rate hikes in 2018. However, now we’re expecting only two. Although interest rates were raised, the overall meeting seemed more dovish than expected.

The focus of the meeting was on upbeat inflation numbers, which probably gave some buoyancy to gold and other precious metals. The gold- and silver-based mining funds, the Sprott Gold Miners ETF (SGDM) and the Global X Silver Miners ETF (SIL), have risen 5.7% and 4.2%, respectively, on a five-day trailing basis.

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Interest rates versus gold

The above chart shows the relationship of gold to the US two-year and ten-year interest rates (SHY) (IEF). Although the inverse relationship between the two is not very exact, they tend to deviate from each other. Over the last six months, however, interest rates and gold have both trended upward.

Aggressive monetary policy tightening could lead to a slump in precious metals since precious metals are non-cash-flow-yielding assets. They could ideally have an adverse reaction to the hike in interest rates.

Among the mining shares that have increased after the Fed meeting were Goldcorp (GG), Royal Gold (RGLD), B2Gold (BTG), and First Majestic Silver (AG). They rose 5.4%, 2.5%, 1.8%, and 4.2%, respectively, on a five-day trailing basis.


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