Which US presidential candidate does gold prefer?
Gold loves chaos and should be hitting new highs, especially with inflation coming down and with it, two rate cuts likely before year’s end.
The long-anticipated interest rate increase by the U.S. Federal Reserve has had the predicted impact on gold.
The U.S. central bank announced today it is raising interest rates by a quarter percentage point, bringing the target range for the federal funds rate to between 0.5% and 0.75%. In a press conference following the decision by the Federal Open Market Committee (FOMC), Fed chair Janet Yellen said the U.S. economy in 2016 has shown enough resilience to handle a rate increase.
“The committee judged that a modest increase to the federal funds rate is appropriate in light of the solid progress we have seen toward our goals of maximum employment and 2% inflation”: US Federal Reserve chair Janet Yellen
“The committee judged that a modest increase to the federal funds rate is appropriate in light of the solid progress we have seen toward our goals of maximum employment and 2% inflation,” Yellen said during prepared remarks, noting the creation of 2.25 million net new jobs. “I do not judge that we are behind the curve,” she said. “We are on a good path to achieve our objectives.” Yellen said the FOMC sees the potential for three more rate hikes next year, which would reflect higher confidence in economic growth.
While the expectation of an interest rate hike has been priced into the gold price, limiting potential downside from the decision, it was the Fed’s more hawkish stance regarding rate hikes next year that surprised the market, and had the predicted impact on gold prices.
Gold is highly sensitive to interest rate and currency fluctuations and today it dropped to a 10-month low following Yellen’s remarks. At the close of trading this afternoon the 24-hour spot price was at $1141.80, a fall of 1.3%, compared to the previous session. Gold slid to a low of $1139.10 before inching back up towards the end of day. Gold futures, meanwhile, shed 0.3% to $1155.20. Investors generally believe that the opportunity cost of owning gold is higher when interest rates rise, leading to sales of physical metal and exchange traded gold funds.
Chart by Kitco.
The word’s largest gold fund, the SPDR Gold Trust, was down 1.47% on the day, with holdings in the trust down over 9% since November, according to CNBC.
Other precious metals saw a mixed reaction from the rate hike, with silver rising 0.9%, platinum gaining 0.4%, and palladium dropping 0.3%.
The Fed decision also sent the U.S. dollar to a 14-year high, with the Wall Street Journal Dollar Index up 0.8% to 91.12. On the stock markets, the Dow was taken on a wild ride, at first rising to a new daily high of 19,966 points then falling to 19,749 an hour later, a spread of 217 points, before rallying to 19,875 in the dying minutes of the session, reports WSJ.
2 Comments
ExPat
It was a much anticipated hike in the Fed Funds rate, but it clearly was not priced into the market for gold and silver. Why?
Nick
“The word’s largest gold fund, the SPDR Gold Trust, was down 1.47% on the day, with holdings in the trust down over 9% since November, according to CNBC.”
How reliable are GLD’s holding reports? GLD does not give retail investors the right to redeem for any of its mystery physical gold holdings. This fact alone ensures the GLD shares to be nothing more than paper at the end of the day. GLD also has a glaring audit loophole in their prospectus that states they have no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this backdoor to the fund. Some other red flags I’ve stumbled upon, verified and welcome everyone else to verify for themselves:
“Did anyone try calling the GLD hotline at 866▪320▪4053 in search of numerical details on GLD’s insurance? The prospectus vaguely states “The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody.” When I asked about how much of the gold was insured, the representative proceeded to act as if he didn’t know and said they were just the “marketing agent” for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors.”
“I remember there was a highly publicized visit by CNBC’s Bob Pisani to GLD’s gold vault. This visit was organized by GLD’s management to prove the existence of GLD’s gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this “GLD” bar was actually owned by ETF Securities.”