This Is Why Gold Stocks Are Getting Crushed Today
Dollar Knocks Gold Prices Below $1,200
Gold prices plunged to a 10-month low on Thursday, sparking a selloff in the price of gold stocks across the board.
The drop follows a two-day meeting by the Federal Open Market Committee (FOMC). On Wednesday, the central bank raised its federal funds target rate by a quarter percentage point to between 0.50% and 0.75%. The market largely expected the committee to raise rates, but officials surprised investors by indicating plans to raise rates three times in 2017.
Gold prices hit their lowest level since February in the biggest one-day drop since November 11. Contract prices for February delivery dropped $37.80 to $11.25 per troy ounce, a decrease of 3.3%,.
Gold stocks dropped in lockstep. The VanEck Vectors Gold Miners ETF (NYSE:GDX) dropped $1.20, or six percent, to $18.70 per share. Shares of larger gold miners like Barrick Gold Corp., Yamana Gold Inc., and Newmont Mining Corp. (NYSE:NEM) were also sharply lower.
Higher interest rates are a major headwind for gold prices. Higher rates increase the returns of interest or dividend-paying assets, which tends to dampen the demand for gold. The decline in spot rates has closely tracked a pickup in the inflation-adjusted yield of U.S. Treasuries.
A stronger U.S. dollar is also putting pressure on gold prices. The U.S. Dollar Index was up 1.7% to 103.49 on Thursday, hitting a 14-year high following the Fed meeting. As the metal is priced in the U.S. currency, a rising dollar makes gold more expensive for foreign buyers when the dollar appreciates.
The headwinds for gold prices are likely to strengthen in the months ahead.
Federal Reserve Chair Janet Yellen indicated that she did not see much need for a large, deficit-financed boost from federal fiscal policy, either tax cuts or spending increases. In a press conference following the meeting on Wednesday, she said the FOMC was, “recognizing the considerable progress the economy has made” toward full employment and an inflation target of two percent. (Source: “YELLEN: It’s too soon to tell how Trump will affect the Fed,” Business Insider, December 14, 2016.)
The continued strength in the U.S. dollar will likely continue to weigh on gold prices and gold stocks into 2017. Higher interest rates, analysts expect, will continue to draw funds out of hard assets and into fixed income.
Dear Reader: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. We are 100% independent in that we are not affiliated with any bank or brokerage house. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose. The opinions in this content are just that, opinions of the authors. We are a publishing company and the opinions, comments, stories, reports, advertisements and articles we publish are for informational and educational purposes only; nothing herein should be considered personalized investment advice. Before you make any investment, check with your investment professional (advisor). We urge our readers to review the financial statements and prospectus of any company they are interested in. We are not responsible for any damages or losses arising from the use of any information herein. Past performance is not a guarantee of future results. All registered trademarks are the property of their respective owners
Sign up to receive our FREE Income Investors newsletter along with our special offers and get our FREE report:
5 Dividend Stocks to Own Forever
This is an entirely free service. No credit card required. You can opt-out at anytime.
We hate spam as much as you do.