Gold plunges to six-year low following fed rate rise

Photo: Epicharmus

Gold has plunged to a six-year low following the Federal Reserve's decision to raise US interest rates.

The landmark move from the Federal Reserve was decided at a meeting on Wednesday 16th December, raising the benchmark rate by 25 basis points for the first time since the financial crisis. The pace, though, is set to remain "gradual", with a projected growth rate of just 1.38 per cent in 2016.

The announcement was expected to hit the precious metals sector hard, as the US economy - and, more specifically, the US dollar - move in opposition to the alternative assets. But precious metals initially emerged unscathed from the news.

The US dollar index rose to a one-week high, before retreating slightly, something that helped to bolster the precious metals. According to Market Realist, gold rose 1.4 per cent, silver 3.5 per cent, platinum 2.4 per cent palladium 0.88 per cent.

The mining sector also responded positively, with ETFs such as the Sprott Gold Miners (SGDM) and the Market Vectors Gold Miners (GDX) gaining 4.4 per cent and 4 per cent respectively.

The upbeat performance was to be short-lived, however, as the dollar and the stock market began to strengthen. The S&P 500 Index enjoyed its biggest three-day rally since 5th October.

"This is a very dovish rate increase," Stephen Wood, chief market strategist for North America at Russell Investments in New York, told Bloomberg. "It came right in in line with expectations and markets appear to like that. It’s the Fed giving its seal of approval on the economy and financial conditions, but also the Fed didn’t surprise with a more aggressive future path."

As traders sold off rival currencies, the dollar eventually climbed a healthy 1 per cent, further moving the market in the opposite direction to precious metals.

Indeed, after gold's brief increase, the metal softened to remain steady at the level reached on Tuesday, ahead of the Fed's meeting. Then, however, gold lost more than $15 dollars "in a matter of minutes", reports the Wall Street Journal, reaching a six-year low of $1,049 an ounce.