Gold has gotten little love this year. With a 1.25 percent drop on Monday, the precious metal has sacrificed what little gains it had in 2015. And it could soon get even worse for bullion.
That's because the Federal Reserve is finally expected to raise its key federal funds rate this year, perhaps as early as June. That could prove to be a highly deleterious event for gold, for several distinct but related reasons.
First, as short-term rates rise, holding gold becomes more painful. Gold is a not-yield-bearing asset, a fact that hardly matters in a world in which dollars are hardly a yield-bearing asset, either. But as the risk-free rate increases, keeping dollars stashed in safe accounts becomes relatively more attractive, compared to hoarding gold.
Second, as rates rise, more people around the world will look to keep their money stashed in greenbacks. The increased interest will cause the dollar itself to rise in value—making the price of gold relatively more expensive for overseas buyers, as Erin Gibbs of S&P Capital IQ points out.
"Since about 60 percent of all buyers of gold are from the Asia/Pacific region, most of the buyers are buying it not in local currencies, but in terms of U.S. dollars," she said. "So as we see this continued dollar appreciation, that makes gold expensive for foreign buyers," tamping down on demand.