GDX’s downward move “has come as gold took a major leg lower, pushed down by a serious rise in bond yields and in the U.S. dollar. These moves, in turn, have come as expectations for a 2016 Federal Reserve hike have risen,” reports CNBC.
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Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield.
The Fed’s reluctance to raise interest rates is contributing to a weaker dollar, which has also helped support USD-denominated gold bullion. Consequently, a weaker USD makes alternative assets like metals more attractive.
“Gold, and the companies that dig it out of the ground, are highly exposed to Fed policy. Fed rate rises mean higher long-term yields and a stronger dollar, both of which hurt gold, a commodity that yields nothing and is denominated in dollars. In fact, strategist Larry McDonald goes so far as to say that trading gold miners is akin to ‘literally trading Fed policy,’ reports CNBC.
For more information on the gold bullion market, visit our gold category.