With the FOMC rate hike decision looming, gold prices have taken a hit.
Gold started the day flat, hovering around $1,863.16 after touching $1,849.90, its lowest since February 16.
“The focus of the market is very much attached to the tightening of monetary policies by the main central banks, especially the Federal Reserve,” said Ricardo Evangelista, senior analyst at ActivTrades. “We’ve seen yields on the 10-year Treasury going above 3% and this is very penalizing for an asset that doesn’t yield like gold.”
Investors are anticipating a 50-point rate hike as the Fed looks for a way to reign in rampant inflation. Experts will also be paying attention to cues from SEC chairman Jerome Powell for any hints about the Fed plan going forward. Gold functions as a reliable inflation hedge; however, higher interest rates and bond yields increase the opportunity cost of holding bullion.
“The dollar remains favoured with the U.S. economy being able to withstand such aggressive tightening regardless of external factors leaving gold exposed to a lengthy drop,” said DailyFX analyst Warren Venketas in a note.
Even though it is a codified popular belief that there exists a relationship between interest rates and the price of gold, the historical outlook is a lot murkier. The correlation between interest rates and the price of gold since 1970 has only been about 28%. In fact, there is some evidence suggesting that gold may benefit as an alternative investment to equities.
Some experts even make the case that gold thrives during rate hike cycles, and have data to back the claim up. During eight of the last 12 rate hike cycles, including the last four, gold averaged a spectacular 49% in gains.
Investors looking to get exposure to the yellow metal can get direct exposure through the Sprott Physical Gold Trust PHYS. For a gold equities play, investors can look at the Sprott Gold Miners ETF (SGDM ) or the Sprott Junior Gold Miners ETF (SGDJ ).
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