It’s been 3 days since the Federal Reserve raised interest rates by 0.25% last Wednesday.
The decision didn’t surprise anyone given that analysts forecasted a 78% likelihood that the Fed would raise rates in December and, so far, markets have reacted as we expected:
Initially, it looks like the rate hike helped boost the dollar higher last week. Higher borrowing costs domestically make the dollar more attractive to yield-seeking investors. The US dollar index is barely below its 14-year high, a level that it will likely retake soon.
One of the side effects of a rising dollar is lower commodity prices. Commodities are priced in US dollars and they become more expensive to foreign buyers when the dollar appreciates.
Gold, oil and many base metals hit new multiyear lows last week. Nothing seems to stop the bear commodity market and, in theory, higher interest rates shouldn’t do anything but cause more pain to commodity producers.
Is There Any Bullish Effect on Metal Prices?
Yes, indeed. Even though higher interest rates could add more downside pressure to this bear market, it could potentially make commodities hit bottom sooner.
How? Low rates in the past decade fueled a massive investment in production facilities, which has led to the glut driving prices down. Higher interest rates also mean higher financing costs which could potentially accelerate production cuts longer term as producers struggle to pay their debts. This might eventually help balance the oversupplied market sooner than later, giving support to metal prices.