Gold and Silver both found themselves under pressure in Tuesday’s trading on a rally in the USD and a rise in U.S. treasury bond yields. Precious metals both posted heavy declines ahead of Wednesday’s key Federal Open Market Committee interest rate decision.
Gold Down Ahead of Fed Rate Decision
The selloff in Gold comes just as the FOMC two-day meeting started. The closely watched meeting will end with a decision on interest rates as well as the release of the monetary policy statement at the meeting’s conclusion on Wednesday. Most analysts are predicting a hold on the interest rates as recent economic data has showed the US economy to be slowing. Despite strong unemployment figures, consumer confidence is waning. Consumer spending has also been falling, as evidenced in the slump in auto sales in April. The raises in interest rates have led to raised repayments for car purchases as well as squeezing consumer spending in general in U.S. households.
Despite the Fed being widely expected to keep interest rates at their present rate, it will be of no surprise if the Federal Reserve will reaffirm its expectations for further economic expansion and inflation in the foreseeable future, which should pave the way for gradual ongoing hikes in the interest rates.
In an environment where interest rates are increasing investor appetite for the yellow metal weakens as the opportunity cost of keeping gold rises relative to other interest-bearing assets like bonds.
Speaking of bonds. the 10-year treasury bond yield bounced back from Monday’s heavy declines to rally in early Tuesday trading. However, they still are below the 3% mark. Rising Treasury yields can mean weakness for gold, which like other commodities does not offer any yield.
US Dollar Rallies to 4 Month High, Gold Down 1%
Finally, the US Dollar rallied against most major currencies on Tuesday, with investors looking ahead to the FOMC meeting and on the back of weak economic data. The US Dollar Index, which measures the USD against a basket of six weighted currencies rose 0.71%, to a new four month high. Elsewhere, the GBP/USD was down over 1% as UK manufacturing hit a 17 month low.
At time of writing, Gold is down 1.11% with a troy ounce trading at $1304.60, whilst Silver is down 1.35%, trading at $16.180.