What’s the Impact of Interest Rates on Precious Metals?

Monetary policies have been crucial in determining the movement in precious metals. Besides the essential data that impact the US dollar, the directional move of policies also influences the directional move in the currency. The rising interest rate supports the US dollar. The higher the interest rate, the more money will flow to the higher-paying country. Suppose the Treasuries rate in the United States rises. Investors will opt for these higher-yield-bearing assets, leaving behind gold. The haven bids for the dollar have also been increasing. Investors may find more safety in the dollar than in gold and other precious metals.

James Bullard, president of the Federal Reserve Bank of St. Louis, said last Thursday that the boost to the US economy is likely to fade over a year or two. That could make the Fed more cautious in raising interest rates.

Because precious metals bear no intermediary cash flows, 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.

The chart above compares the price of gold to US two-year and ten-year interest rates. The iShares 7–10 Year Treasury Bond (IEF) closely tracks ten-year bonds, while the iShares 1–3 Year Treasury Bond (SHY) tracks shorter-term bonds. IEF has fallen 1.9%, and SHY has risen 0.04%. The rising yield is a negative factor for bond prices.

This scenario is optimistic for interest rates but not for gold prices. The negative impact on gold also extends to gold mining companies. Coeur Mining (CDE), Cia De Minas Buenaventura (BVN), Yamana Gold (AUY), and Hecla Mining (HL) have declined 2.2%, 8.4%, 3.4%, and 6.2%, respectively, on a five-day trailing basis.