Fed Fear Sends Gold Plummeting on Thursday
Gold Touches Three-Week Low on Fed Fear
Sluggishness for gold
Gold touched its three-week low on Thursday, May 19, 2016. The fall in precious metals was an extension of the previous day’s trade. Gold has been sluggish for the past few trading days. It closed at $1,254.80 per ounce after hitting bottom at $1,244.60. It fell about 1.5% lower than its close on Wednesday, May 18. Silver fell 3.7% on Thursday, tumbling more than its fellow precious metal.
So what’s the reason behind the drastic fall in gold? It’s the FOMC’s (Federal Open Market Committee) minutes from its April 26–27, 2016, meeting. They indicated that the Fed is likely to raise rates if economic data point to stronger second-quarter growth as well as strengthening inflation and employment. Gold, the king of precious metals, is highly reactive to Federal Reserve members’ comments on the interest rate policy.
Miners hold strong despite fall in gold The US stock market also closed lower on Thursday after comments from William Dudley, president of the Federal Reserve Bank of New York, and the release of the Fed minutes. The minutes increased the plausibility of an interest rate hike in June. Dudley mentioned that June could be an active meeting, and he was quite pleased that Market expectations for the probability of a June or July rate hike had risen. Since gold is a non-yield-bearer, a higher rate of interest gives fierce competition to gold and causes it to fall. The opportunity cost of gold rises with a higher interest rate. Gold funds such as the iShares Gold Trust (IAU) and the silver-based iShares Silver Trust (SLV) fell 0.17% and 2.1% respectively. But despite the heavy fall in precious metals, mining shares held strong. Shares of Barrick Gold (ABX), AngloGold Ashanti (AU), and Coeur Mining (CDE) increased 3%, 2.8%, and 2.2%, respectively. These three miners together make up 11.8% of the fluctuations in the VanEck Vectors Gold Miners ETF (GDX). In the next part, we’ll see how the Fed keeps a strong grip on gold.
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