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Could Interest Rates Pull Precious Metals Lower?

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Mar. 20 2018, Updated 9:49 a.m. ET

Precious metal prices

Gold prices ended in the green on Monday after touching their two-week low of $1,307.3 per ounce. Gold prices rose 0.42% and closed the day at $1,316.8 an ounce. Silver and platinum also saw the same trend as gold and were up 0.33% and 0.44%, respectively, on Monday. Palladium, however, was marginally down 0.12% for the day.

Earlier, precious metals were trading low due to the fear of interest rate hikes after the Federal Reserve’s March meeting, which started today. Precious metals often react in advance to expected interest rate hikes with massive falls. Then after a hike, they often surge.

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Inverse relationship

As precious metals are all non-yield-bearing assets, the surge in the interest rates offered on US Treasuries often pulls them lower. Gold doesn’t pay intermediary cash flows. However, it does provide a buffer during rising unrest.

The above chart shows gold against the US two-year and ten-year interest rates (SHY) (IEF). The movement in gold and silver is also closely reflected in gold-based and silver-based funds like the iShares Gold Trust (IAU) and the iShares Silver Trust (SLV). These funds have fallen 0.47% and 1.4%, respectively, on a five-day trailing basis mostly in anticipation of the rate hike.

The inverse relationship between gold and interest rates is not very prominent, but it inevitably impacts precious metals. Mining stocks that also take their movement from gold and silver have reacted to the expected rate hike. B2Gold (BTG), Goldcorp. (GG), Barrick Gold (ABX), and Coeur Mining (CDE) declined 5.5%, 0.52%, 0.49%, and 4.1%, respectively, on Monday.

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