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March Federal Reserve Rate Hike Expectations Place Cap on Gold Gains

March 6, 2017 at 17:58 by Andrew Moran

Gold prices are staying flat to kick off the trading week as growing expectations on an increase to interest rates by the Federal Reserve are placing a cap on the yellow metal’s gains. Geopolitical concerns, however, are supporting gold prices on Monday.

April gold futures rose $0.70, or 0.06%, to $1,227.20 per ounce at 16:32 GMT on Monday. This comes as gold posted its biggest weekly loss since November as the yellow metal shed more than 2% last week. It also recorded its first weekly loss in the last five trading weeks.

Silver is adding modest gains. May silver futures climbed $0.06, or 0.34%, to $17.80 an ounce. Silver also endured a weekly loss of 3.6% last week.

Despite the lackluster performance to start the trading week, gold is up about 6% year-to-date, while silver is also up roughly 10%.

Traders are now fully expecting that the US central bank will pull the trigger on a rate hike at next week’s Federal Open Market Committee (FOMC) meeting. After positive economic signals, hints by Fed officials, and a surging stock market, the market believes Fed Chair Janet Yellen will proceed with a rate hike. According to the CME Group FedWatch tool, there is a near 90% chance of a third rate hike in a decade.

Gold is sensitive to a rising-rate environment because it lifts the opportunity cost and sends investors into yield-bearing assets.

The yellow metal could be further impacted by this week’s non-farm payrolls report.

With a strong jobs report expected to be released and a rate hike likely to happen, the US dollar could strengthen in March. A strong dollar is bad for commodities like gold and silver because they become expensive for foreign investors to purchase.

Political strife, both foreign and domestic, is supporting gold’s mild increase. Uncertainty surrounding the French presidential election, the North Korean government’s ballistic missile launches, China’s economy, and the Donald Trump administration are generating short-term interest in precious metals.

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