Precious metals May Get Allergic from a Fed Rate Hike
CME Group forecast
According to the data from the CME Group, the probability of a December liftoff is now at 71%, drastically up from 48% about a month back. However, Fed officials may likely have a gradual and slow progress toward the rate hike. CME Group’s FedWatch tool is based on the trading of federal funds futures contracts. FedWatch states that there is a 7% chance that rates will be at 0.25% by March, a 46% chance that the target rate will be at 0.5%, a 42% chance it will be at 0.75%, and a 6% chance it will be at 1%.
However, despite these unprecedented numbers, economists widely expect the Fed to announce an increase in the target range for the fed funds rate to 0.25%–0.5% from 0%–0.25%.
This tightening move by the US comes as the rest of world loosens to improve economic activity. For example, the ECB (European Central Bank) recently eased its rates to pump up the economy.
After the October FOMC meeting that was expected to be quite dovish, the rates of precious metals took a nosedive. Gold and silver futures gave up almost 10% and 13%, respectively, after October 28, 2015, when the Fed indicated that the rates would most likely surge at December’s policy-setting meeting. Whereas, platinum and palladium lost a whopping 16% and 20%, respectively, after October’s meeting.
Is the hike already priced?
Concerns are rising among investors on whether the increase in the interest rates is already priced in precious metals as the numbers above indicate a drastic fall in these metals. The rate hike would not only curb the appeal of non-interest-bearing metals, but also the ETFs that take their prices from them. ETFs like the Global X Silver Miners ETF (SIL) and Sprott Gold Miners (SGDM) have also suffered due to the fall in precious metals. Mining companies that have most suffered in the past month include Aurico Gold (AUQ), Cia De Minas Buenaventura (BVN), and Alacer Gold (ASR).
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