Thursday morning saw the precious metals tumble in response to yesterday’s interest-rate increase by the Federal Reserve. Spot gold gave up nearly all of its ground on Wednesday afternoon after the Fed decided to raise interest rates by 25 basis points to the 1.00%-1.25% range.
After spiking during early trading yesterday, the precious metals fell sharply after the FOMC announcement. Here are the closing numbers:
Gold: $1,260.10/oz (-$6.00, -0.47%)
Silver: $16.86/oz (+$0.06, +0.36%)
Platinum: $934/oz (+$12.00, +1.30%)
Palladium: $851/oz (-$17.00, -1.96%)
The downturn only continued on Thursday, as gold fell another 0.5% to trade at $1,253/oz. Palladium opened modestly higher after losing almost 2% yesterday, while spot silver and platinum lost 1% and 1.5%, respectively. The losses for silver pushed the argent metal down to about $16.70/oz. This movement also brings the platinum-palladium ratio back into a tight range after the mixed performance yesterday finally widened the spread between the two sister metals.
Thursday’s losses for gold were nearly a mirror image of the dollar appreciating, which is to be expected with higher interest rates on the horizon. The USD was up more than 0.5% this morning to 97.5 on the DXY index. The 10-year Treasury yield eased slightly to 2.16%, but Wall St was sharply lower at the opening bell. Similarly, stock indices across Europe were more than 1% in the red this morning.
Central Bank Action
It’s been no secret that the Fed has planned to gradually raise interest rates as part of its plan to unwind a decade of ultra-accommodative monetary policy. However, even though this has come as no surprise, the markets are beginning to worry about the implications of the Fed’s tightening of policy.
The Fed has two mandates from Congress (though it’s debatable whether these guidelines are necessarily the right prescription for the central bank): to encourage full employment and ensure a stable currency (i.e. a 2% inflation target). Although much is hidden behind the unemployment statistics published by the government, the Fed has largely fulfilled this objective. It now turns toward combating inflation—and its main weapon in this fight is the federal funds rate.
The natural response to the rising rates and tighter financial conditions that are associated with an improving economic outlook has been a flight from equities. Potentially harming the stock markets has been one of the main motivations that has prevented the Fed from hiking interest rates at a faster clip over the last three years. In some sense, the central bank is now “taking the gloves off” in terms of accommodating the whims of Wall St.
Yet the Fed is hardly the only central bank making waves with policy changes. A divided vote by the Bank of England’s monetary policy committee caught many off-guard this morning, suggesting that the BoE may in fact begin its own rate-hike cycle in the near future. This is far sooner than many expected, especially given the uncertainty that remains with the Brexit negotiations. The news helped lift the pound sterling, which was hit hard following the surprising election result that erased the Tories’ majority in Parliament. Reuters notes, however, that “the vote may be chiefly a way of the Bank [of England] supporting the pound without actually changing policy conditions,” a trick that the Fed has often employed to influence markets without actually raising rates.
Elsewhere, the yuan remained steady after the People’s Bank of China, the country’s central bank, decided to leave its own key interest rate unchanged. This year, the PBoC has often followed the lead of the Fed, but the relatively strong performance of their currency has made it easier for the bank to justify taking no further action at the moment.
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