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Fed rate hike whacks gold

Duncan Richardson, News Editor
15 Dec 2016, 1:59 p.m.

Gold denominated in U.S. dollars reacted badly to the Federal Reserve's decision to increase interest rates by a quarter of a percentage point. Despite the rise being widely expected the gold price dropped below $1,140 per oz. Raising rates puts downward pressure on gold as it increases the opportunity cost of holding the yellow metal. The Fed's decision pushed the U.S. dollar to a 14 year high against a basket of the world's leading currencies.

Higher rates will increase the cost of borrowing, strengthen the dollar and make U.S. exports less competitive. But here lies the problem. The U.S. trade deficit currently stands at around 40 billion a month and this gap is currently plugged by exporting federal debt. With higher rates this process will become more and more expensive to service.

Fed Chair, Janet Yellen, is forecasting a further three rate increases in 2017 and a further two in 2018. With U.S Federal debt now standing at a staggering $17.8 trillion, this appears optimistic at best.

The gold price has fallen further this morning and is currently trading at £907 per ounce. Silver, platinum, and palladium are also in negative territory following yesterday's rate hike.

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