Precious Metals Monthly – US rates matter

by: Georgette Boele

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US monetary policy to have a more negative impact…

Gold prices tend to come under modest pressure when US interest rates rise, while other precious metals don’t tend to be negatively affected. Recently, however, we may have seen a change in pattern. For example, expectations of higher interest rates for December 2015 have coincided with substantially negative performances in precious metal prices.

…and the US dollar to remain a negative force going forward…

There tends to be a strongly negative affect on precious metals when the US dollar is strong. A combination of higher US interest rates, a higher US dollar and positive investor sentiment will probably increase the intensity of the negative relationship. As a result, precious metal prices could fall under heavy pressure.

…but a change in investor sentiment could change behaviour

Precious metal prices tend to have a modestly negative relationship with equity volatility (VIX). This makes sense in the case of platinum and palladium, which are more sensitive to the outlook of the global economy. In periods of risk aversion, palladium and platinum tend to suffer the most, explaining the negative relationship with equity volatility. Gold prices and equity volatility tend to have a volatile unstable relationship. On the one hand, in periods of low global (real) yields with a risk-seeking attitude among investors, gold is seen as an attractive asset. Therefore, gold prices and equity volatility have a negative relationship. On the other hand, in periods or risk aversion gold prices could be supported because of safe haven demand (except in a liquidity crisis), resulting in a positive correlation with equity volatility.

PM monthly 29 Aug