Fed rate hike whacks gold
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.
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.