Bullion Appeal Dented by Higher Interest Rates, Hopes of Peace

APMEX

3/18/2022 12:49:13 PM

For weeks, investors in the U.S. have anticipated the Federal Reserve’s first interest rate increase since 2018. Persistent, record inflation has driven the Federal Reserve to pursue a more hawkish stance in recent months.

However, many have wondered just how hawkish Fed policy will tilt in the face of a Russian invasion of Ukraine. 
Seemingly in anticipation of a rate hike, stocks in the U.S. dropped as the week began. At the same time Brent crude oil dropped by nearly 9% as the fourth round of talks between Russian and Ukrainian officials were underway. 

Gold also lost on Monday, shedding 3.5% on its way to two-week lows of $1,907. Meanwhile, silver dipped by 2.5% to $25.03 as the prospect of higher interest rates dented the safe-haven appeal of precious metals. The 10-year Treasury yield reached three-year highs near 2.145% on Monday, while investors continued to focus on the Wednesday’s Fed update.  

Risk-on sentiment was prevalent on Tuesday as negations between Russia and Ukraine continued but failed to result in a ceasefire. On the same day, Treasury yields surged again, which further pressured bullion. Major U.S. stock indices rose on Tuesday, with the S&P 500 breaking a five-day losing streak. The Nasdaq and Dow Jones Industrial average also saw gains Tuesday, rising 2.8% and 1.9%, respectively. 

Riskier assets such as cryptocurrencies saw gains Wednesday morning ahead of the FOMC announcement. Bitcoin prices were up by over 6% from weekend lows near $36,500. Wednesday saw the conclusion of the Fed’s two-day meeting and subsequent monetary policy update. 

The Fed announced a 0.25% rate hike, which would be the first rate increase since late 2018. It was also announced that six additional rate hikes should be expected for 2022. Additionally, Fed members increased their inflation estimates, while outlining steps to reduce the Fed’s $9 trillion balance sheet. 

Gold dipped by 1.5% following the rate hike news. The yellow metal would touch its weekly low of $1898, but steadied closer to $1,926 before the day’s end. Stocks in the U.S. rallied following the Fed announcement, as the Nasdaq gained 3.8% and the S&P 500 surged by 2.2%. Meanwhile, the U.S. Dollar Index pulled back by 0.5% while Treasury yields declined from recent highs.

By Thursday, investors had time to digest the Fed announcement. This, and a better-than-expected number for jobless claims fueled a third consecutive day of stock market rallies in the U.S. Gold and silver were slightly higher Thursday, near $1,949 and $25.52, respectively. Metal gains on Thursday were largely fueled by a drop in the dollar and Treasury yields. 

U.S. equities were down on Friday morning, but major indices such as the S&P 500 are eyeing their first weekly gain in three weeks. A stronger dollar weighed on bullion prices Friday, with gold briefly touching $1,922, and silver dipping below the $25 mark. Both metals bounced but are still looking at weekly losses. 

Despite continued violence and the lack of a ceasefire in Ukraine, hopes of peace talks between the two nations plagued risk appetite throughout the week. This, along with higher interest rates, are major drivers for what is currently a 2.1% weekly decline for gold and 2.2% loss for silver.