Aside from the Trump trauma that gripped markets last week, another specific focus on Friday, March 24, was the US Federal Reserve. Three Fed officials—Charles Evans, James Bullard, and William Dudley—lined up to give their opinions on the economic scene following the Fed’s most recent interest rate hike as well as on the number of hikes that could follow in 2017.
William Dudley mentioned that delicate interest rate hikes are necessary, given the relative stability of the economy. If the employment figures get better, it could lead to an inflation run-up, which is one of the most influential factors in any rate hike decision. But James Bullard hinted toward only one more hike in for 2017. Charles Evans didn’t address monetary policy in Washington.
The above chart depicts of the performance of gold against US two- and ten-year rates of interest. As you can see, as the rate reaches a peak, gold tends to fall.
Gold versus interest rates
To be sure, precious metals are highly sensitive to rising US interest rates, which increase the opportunity costs of holding non-yielding precious metals. Higher interest rates can also take the US dollar higher, negatively impacting dollar-based metals.
Further interest rate hikes could thus be negative for gold, while the rising risk in markets could buoy precious metals. At the same time, the higher the intermediary cash flows provided on US Treasuries, the lower the demand could be for metals like gold and silver.
Source: Market Realist