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How Is the Fed Influencing Precious Metal Demand?

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Interest rates

The Fed has hinted that there could be two more interest rate hikes this year, for a total of four hikes in 2018. Investors are closely watching non-farm payroll data, which indicates the overall economy’s potential. Inflation meeting its targeted 2% is also among the Fed’s considerations.

Fed officials unanimously raised the lending rate to a targeted range of 1.75%–2%. Because precious metals bear no intermediary cash flow, higher interest rates by US fixed-income securities could shift more investors from precious metals to Treasuries. The trend could result in less demand for precious metals and a decline in prices. Rising inflation could, however, be more supportive of precious metals.

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Funds and miners

The chart above compares the price of gold with US two-year and ten-year interest rates. The iShares 7-10 Year Treasury Bond ETF (IEF) closely tracks ten-year bonds, while the iShares 1-3 Year Treasury Bond ETF (SHY) tracks shorter-term bonds. Meanwhile, demand for physical gold in India has been lackluster, possibly due to prices falling.

Interest rates’ impact on gold extends to gold mining companies. Newmont Mining (NEM), New Gold (NGD), Agnico Eagle Mines (AEM), and Goldcorp (GG) have risen 3.9%, 4.9%, 8.1%, and 6.3%, respectively, in the last five days.

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