Gold Price Falls on US Interest Rate Hike Rumours

Shares in gold miners dropped today thanks to renewed speculation on a Federal Reserve rate hike this year. Is it a temporary drop or is it the start of a long term decline? 

Karen Kwok 22 August, 2016 | 4:46PM
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Shares of gold mining stocks weakened on Monday after comments from Federal Reserve officials renewed speculation of a US interest rate hike later this year.

The question is whether gold is a valuable inflation-protector or an asset with no underlying value

Speaking in Colorado on Sunday, the US central bank’s vice chairman, Stanley Fischer, said the US was “close” to hitting targets for employment and inflation. Fischer’s speech fuelled debates about one possible interest rate hike in the US this year, despite minutes from the US central bank last week showing officials divided over an interest rate hike.

In early trading on Monday both precious metal miners Fresnillo (FRES) and Randgold Resources (RRS) fell 6% and 5% respectively, following a 0.6% decrease of gold price to $1017.63 per ounce. Shares of other miners also dropped; Anglo American (AAL) fell 4.2%, while Antofagasta (ANTO) and Glencore (GLEN) both fell more than 3%. Rio Tinto (RIO) and BHP Billiton (BLT) also saw shares 2.5% lower today.

While gold miner shares have been pulled back by interest rate hike speculation today, Fresnillo and Randgold Resources have rallied 46% year to date.

James Sutton, client portfolio manager of the Bronze Rated JP Morgan Natural Resources fund believes it remains a good environment for gold, but admitted there would be short term volatility before the next US interest rate hike.

“We still have a very low interest rate environment outside US; a supportive environment for gold,” Sutton said.

The slip for gold mining stocks is temporary, according to Danny Dolan, chief executive officer of China Post Global, an asset management firm. 

“The strong fundamentals that have driven up gold mining stock prices in recent months continue to apply. Even in the event of an early Fed rate hike, demand for gold will remain strong and gold mining companies will remain well positioned to benefit,” Dolan said.

Alex Dryden, global market strategist at JP Morgan agreed, adding that how gold interacts with other assets in investors’ portfolio has been changed considerably in the last year and he continues to see a strong run in gold.

Dan Kemp, chief investment officer for Morningstar Investment Management, reminded investors that investing in gold remains one of the most controversial exposures; fuelled by three persuasive themes – fear of an economic crisis, a change in the sovereign wealth funds asset composition, and bonds losing their appeal.

“The popularity of gold is evident as it has increased 26.5% in value from January to July and is the strongest performing hard-commodity over most extended time-periods. The question is whether gold is a valuable inflation-protector or an asset with no underlying value,” Kemp said.

Yellen Speech in Jackson Hole

The annual Federal Reserve conference in Jackson Hole, Wyoming, later this week, with Chair Janet Yellen due to speak on Friday. She is expected to give a signal of whether the Fed is ready to raise interest rates.

Dryden expects Yellen to deliver more hawkish comment in the Jackson Hole meeting in order to get the market expectation moving up closer to a 80% probability from the current level of 45%.

“At the moment the market only prices in a 45% chance an interest rate hike in December, but the market needs to be much closer to 80 or 90% market probability in order to avoid a significant amount of volatility if they do raise interest rates,” Dryden said, adding that investors should continue to keep an eye on the coming employment and wages data in the US.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk