Monday morning saw the precious metals continue to steadily track higher, catching the markets a bit off guard. Given the fact that interest rates have been forecast higher, most observers have been expecting a stronger dollar to knock gold prices lower. However, spot gold opened about $3 higher to $1,238 per ounce around 9:30 am in New York. Spot silver gained roughly 0.2% to remain above $18/oz.
Meanwhile, both Platinum Group Metals (platinum and palladium) were marginally in negative territory, opening at $1,005/oz and $775/oz, respectively.
After ending mixed on Friday, stock and bond markets in the U.S. are closed on Monday in observance of the President’s Day holiday.
It’s not just the fact that the Federal Reserve has increased the fed funds rate a quarter-percent each of the past two Decembers that has the markets forecasting higher interest rates this year. With the March meeting of the FOMC approaching, Fed officials have been talking up raising rates. Chair Janet Yellen gave her biannual congressional testimony to the House Financial Services and Senate Banking committees and likewise spoke about the virtues of tightening monetary policy in the current economic environment.
This is generally seen as a negative development for the precious metals: higher rates makes holding or storing commodities more costly compared to yield-bearing assets. So there are plenty of forces driving the expectation that gold will lose ground as rates go up and the broader economic outlook improves.
However, this isn’t what has happened. Thus far this year, gold has rallied 7% even as the stock market has hit new highs and the dollar has been mostly firmer. The metals have shown an uncommon affinity for attracting safe-haven demand even in the face of a strong dollar. The greenback was a tick below unchanged on Monday but still near 101.0 on the DXY index.
Global stock indices were mixed, with European markets trading in the red while Asian markets were mostly higher overnight. Renewed concerns over Greece’s future in Europe, which have essentially been kicked down the road since last Summer, are raising alarms for another impending euro crisis. The common currency began the trading session at just $1.06 (EUR/USD), near six-week lows. Monday morning also saw crude oil prices move about 0.3% higher as OPEC has reported 90% compliance with its targeted production cuts.
It seems that even as the Fed remains hawkish, the pall of uncertainty surrounding the success of the new presidential administration has shown risk-averse investors an opening. For the second straight year following a rate hike, the gold price has done well in January. This naturally caught attention from speculators, driving up interest in gold ETFs like the SPDR Gold Trust (GLD).
It’s worth noting that some analysts have observed that, contrary to the common wisdom, gold actually rose during the previous rate-hike cycle about a decade ago when the Fed gradually increased interest rates.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.