Why Investors Have Stopped Pouring Money into Precious Metals
DXY gains strength
Gold continued its losing streak on Monday, April 4, 2015, as a result of fear of an interest rate hike. In 1Q16, gold posted its brightest quarter in the past 30 years by rallying more than 15%. The metal is highly exposed to risks of higher interest rates, which raise the cost of holding non-yielding assets. The dollar gets a boost when interest rates rise.
Eric Rosengren, president and CEO of the Federal Reserve Bank of Boston, is usually a dovish banker. However, he commented that he is surprised that futures markets predict only one or no rate hike in 2016. He mentioned that this prediction may be “too pessimistic.”
The US dollar, depicted by the US Dollar Index (DXY), rose 0.21% on Monday despite the lurking fear of an interest rate hike. The DXY currency prices the US dollar against a basket of six major world currencies.
The strengthening dollar often weighs on dollar-denominated assets like precious metals and other commodities. Investors often pounce on the dollar-denominated assets when the dollar is weak.
Miners plummeted
The loss of the precious metals caused a retreat in the precious metal mining–based funds, as well. The Direxion Daily Gold Miners ETF (NUGT) and the ProShares Ultra Silver ETF (AGQ) fell 8.5% and 1.9%, respectively, on Monday.
The mining stocks that fell on Monday include Alamos Gold (AGI), Gold Fields (GFI), and Primero Mining (PPP). These three companies fell 7.3%, 8.8%, and 4.8%, respectively. Together, these three companies make up 5.3% of the Market Vectors Gold Miners ETF (GDX). GDX fell 2.9% on Monday.
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