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Gold Sheds 3% in Fed Rate Hike Fallout

December 15, 2016 at 18:05 by Andrew Moran

Gold is being battered in the fallout of Wednesday’s Federal Reserve rate hike. The yellow metal has tumbled more than 3% as traders flee gold and head into yield-bearing assets. Can gold shed most of its 2016 gains as the year comes to an end?

February gold futures fell $36.60, or 3.15%, to $1,127.10 per ounce at 16:39 GMT on Thursday. This is the biggest one-day decline since mid-2013. Gold prices are poised to settle at their lowest levels since February 2 and is set to post its sixth consecutive weekly loss. The yellow metal has been in a downward spiral since the November 8 US election as it has lost close to 12% of its value, and is off 17% since reaching its $1,367 peak in July.

Silver is not performing any better. February silver futures plummeted $1.24, or 7.21%, to $15.98 an ounce and are trading at seven-month lows. Silver is on track for its worst trading day performance since June.

The US central bank announced on Wednesday that the Federal Open Market Committee (FOMC) voted unanimously to raise interest rates for just the second time in a decade. Policymakers said that it will raise rates three times next year, two to three times in 2018, and three times in 2019.

Fed Chair Janet Yellen and the Board of Governors agreed to increase the target range from a range of 0.25% to 0.5% to a range of 0.5% to 0.75%. Also, the discount rate was boosted from 1% to 1.25%. The overnight funds rate remained unchanged at 0.41%.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

This helped push up the US dollar to a 13-year high.

Gold is in for a rough ride as it is sensitive to rising rates and a stronger greenback. In a rising-rate environment, the opportunity cost goes up and investors flee from commodities like gold and silver and into assets that generate a yield. When the US dollar climbs, precious metals become more expensive for foreign investors.

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