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How Gold Is Pressured by Interest Rates and the US Dollar

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Mar. 2 2018, Updated 2:03 p.m. ET

Surging dollar

All four precious metals moved southward on Tuesday, February 27, primarily due to the rising strength of the US dollar. The US dollar, which is depicted by the DXY index, had increased 0.56% on the same day.

The DXY index traded at 90.4, gaining ~1.5% over the past one-month period and reaching a two-week peak level.

The rise in the US dollar was mostly led by statements by Jerome Powell, chair of the Federal Reserve. In his report to Congress, Powell stated that the rate hikes would continue despite the stimulus from tax cuts and government spending. The Fed has signaled that three or four rate hikes are coming up in 2018, which could mean strength for the dollar and weakness for gold.

Increasing interest rates could mean that more global investors could be interested in investing in the higher yields offered by US Treasuries. This trend indicates greater demand for the US dollar. Higher yields also mean lower demand for non-yield-bearing precious metals like gold and silver.

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Impact on funds and miners

Gold and silver dropped 1.1% and 1.2%, respectively, on February 27 to trade at $1,315.00 per ounce and $16.30 per ounce, respectively. The surge in the dollar means lower demand for dollar-based assets. As precious metals are dollar-based assets, they retreat as the dollar rises. These factors point to a dual impact on precious metal prices—the upcoming rate hikes and the surging US dollar.

The mining shares that slumped include AngloGold Ashanti (AU), Goldcorp (GG), New Gold (NGD), and Eldorado Gold (EGO), falling 4.7%, 2.0%, 5.6%, and 4.5%, respectively.

The SPDR Gold Shares ETF (GLD) and the iShares Silver Trust ETF (SLV) also declined 1.0% and 1.3%, respectively, on February 27, 2018.

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