Gold Sinks, Dollar Rises On Janet Yellen’s Comments

Memorial Day is typically a day off for many people in the financial sector - but that doesn't mean there can’t be major moves in the world of gold, the U.S. dollar, and the Federal Reserve.

Today it’s Federal Reserve Chief Janet Yellen adding to recent signals that the Fed might see a potential rate hike in the cards this summer. Previously, it had only been the head of local Federal Reserve banks that had suggested as much, but when the Federal Reserve chief says something, the markets watch.

And that’s no different on Memorial Day.

Gold At 3 ½ Month Low While Dollar Rises

It goes to show just how powerful any words from Yellen can be in this market that the price of gold fell to below $1,200 for the first time in a while today. Says CNBC, “Gold fell below $1,200 for the first time since mid-February on Monday, as comments from Federal Reserve chief Janet Yellen on the likelihood of higher U.S. interest rates sent the dollar to two-month highs.”

Yellen saw a potential rate hike “in the coming months” (a vague term that most would think applies to the June end-of-quarter) and the markets responded by sending the dollar much higher and gold that much lower. As frequent readers of this space will know by now, gold and the U.S. dollar tend to have an inverse relationship over time, with a few caveats. That’s no different today, as the stronger U.S. dollar suggested that the price of gold may stick around below $1,200 for the time being.

Or, as CNBC put it, “An increase in US rates would raise the opportunity cost of holding gold, which does not earn interest. It would also bolster the dollar, making gold more expensive for other currency holders.”

As of the time of this writing, gold is barely above $1,200 and still down on the day. This could indicate that there’s been a recent buyback, as investors who still believe in gold are looking to take advantage of the temporarily-low prices. But it raises another interesting point - just how serious is Yellen, really?

Will The Fed Really Raise Rates?

Gold Bug and Euro Pacific Capital Chief Peter Schiff recently went on CNBC mentioned the idea that these statements by the Fed chiefs are really just trial balloons designed to see how the market might react to increases in rates. According to Schiff, the Federal Reserve isn’t really all that serious about raising rates, but is, instead, looking to continue the idea that the economy is performing better than it really is.

In the long term that may turn out to be true. Only time will tell. But keep in mind just how strong the indications of a rate hike this summer are from the Fed - and if no rate hike comes, that may say more than any newspaper quote about where the Federal Reserve really sees the state of the U.S. economy in 2016. For now, the gold price appears to be at a discount, and may well stay there until there is significant movement from the Fed.