Gold Investors Shouldn’t Fear Fed Rate Hikes

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As small business owners know and understand well, the labor market is getting tighter. It’s getting harder and harder to find qualified employees to fill open positions. This first-hand experience was confirmed by the U.S. Labor Department’s latest jobs report. In July, U.S. employers created a higher-than-expected 225,000 new jobs.

Shifting winds: This triggered another shift in expectations regarding when and if the Federal Reserve will hike interest rates in 2016.

Just a few months ago: At the start of 2016, Fed Chair Janet Yellen and team were expected to hike rates gradually throughout the year with as many as three or four interest rate hikes forecast.

Boulders in the road: Early-year stock market volatility and concerns about Chinese growth, still-sluggish inflation levels in the U.S. and more recently the unexpected news from the U.K. to vote to leave the European Union widely known as Brexit have all splashed cold water on the Fed’s desire to “normalize” interest rates.

Gold prices initially softened on the better-than-expected employment news as it triggered speculation the U.S. Federal Reserve could tighten sooner rather than later.

But, here are three reasons gold investors don’t need to worry about Fed rate hikes.

The Fed’s benchmark interest rate called the federal funds rate — remains historically depressed well below normal.

The current fed funds rate stands at 0.25-0.50% –the central bank lifted the key rate off the zero-bound level in December 2017.

Even if the Fed were able to squeeze in one or two interest rate increases in 2016 it would still leave the federal funds rate well below the more historically normal 3.5-4.0% level.

History shows: Just look back at the federal funds rate level in 2005 prior to the global financial crisis that hit in 2008. The Fed funds rate ranged from a low at 2.50% to a high at 4.25%. The peak of that interest rate hiking cycle stood at 5.25% in June 2006. See Figure 1 below.

Why this matters: Even a marginal rate of increase in the funds rate in 2016 will keep interest rates at historically low levels in the United States.

Fed Rates 1 (1)


The Current Economic Expansion Phase in the U.S. Is Old

The U.S. economy moves in traditional expansion and recession cycles. That’s normal. As many business owners know first-hand, the current expansion phase never really hit full-speed.

Quick look-back: While the Great Recession ended in officially in June 2009, the current economic recovery phase has never hit so-called “trend” or historically average growth levels around the 3.5% level or higher on a sustained annualized basis. Instead the U.S. economy has been limping along with meager growth numbers well below the long-term historical averages.

Economics 101:The average length of a U.S. expansion cycle (trough to trough) is 69.5 months, according to the National Bureau of Economic Research (the arbiter of when recessions start and end in the U.S.). The U.S. economy is currently in its 86th month of “expansion.”

Key point: It’s long in the tooth. This current “expansion” cycle is running on fumes.

The current outlook: Wells Fargo Economics currently forecasts at 1.4% gross domestic product (GDP) reading in 2016 and the firm downgraded its outlook for 2017 to 1.9% from a previous 2.1%. It’s growth, but extremely sluggish by historical standards.

Why this matters: With the economy now in its seventh year of expansion, the odds are increasing that the next recession hits before the Fed has a chance to normalize interest rates back toward the 3.50-4.0% level.

This is gold-bullish and will keep monetary policy soft and negative interest rates in play as a possibility for the U.S. in the future.

Investment Demand For Gold Is Soaring.

Record investment demand was seen for gold in the first half of 2016, according to latest World Gold Council figures. See Figure 2 below.

Fed Rates 2


Gold demand numbers: Global gold demand reached 2,335 tonnes (t) in the first half of 2016 with investment reaching record H1 levels, 16% higher than the previous record in H1 2009, according to the World Gold Councils latest Gold Demand Trends report.

The strength of this quarters demand means that the first half of 2016 has been the second highest for gold on record, weighing in at 2,335t. The global picture for gold is dominated by considerable and continued investment demand driven by the West as investors rebalance their investments in response to the ever-expanding pool of negative yielding governmentbonds and heightened political and economic uncertainty,” says Alistair Hewitt, head of market intelligence at the World Gold Council.

“The foundations for this demand are strong and diverse, drawing on a broad spectrum of investors accessing gold via a range of products, with gold-backed ETFs and bars and coins performing particularly strongly,” Hewitt adds.

Diversify With Gold

Diversification is key to any successful portfolio. Individual investors who seek to diversify their portfolio can look to physical gold investment as a beneficial portfolio diversifier. The argument for diversification is to hold a variety of assets that are non-correlated to lower overall risk. Over the past 10 years, the average correlation of gold to the U.S. stock market has been close to zero, according to World Gold Council research[KB1][KB2].

Along with its traditional draw as a safe-haven investment, a vehicle to store and grow wealth, and an inflation hedge, gold has proven to be an excellent portfolio diversifier.

Why that matters: When stock prices fall sharply, gold has shown a tendency to rise.

Early in 2016 revealed an example of that phenomena. The numbers: Stocks down, gold investments up — The S&P 500 tumbled 5.5% lower through February 29, and gold stocks (a subsector of materials in the S&P 500) soared 43.6% in the same time period, according to data from S&P Global Market Intelligence.

Gold Buying Strategy

Many gold investors use a dollar-cost averaging strategy, or allocate a set dollar amount to gold purchases each month. It’s easy to get started buying gold coins. Learn more here.

Tip: Savvy gold buyers can fine-tune a dollar-cost averaging strategy to buy on price retreats.

Bottom line: The overall uptrend in gold remains positive. Gold dips have been used as buying opportunities all year, as physical buyers around the globe continue to build positions in the yellow metal. Savvy investors buy on price retreats.

Talk to the experts:Blanchardhas helped more than 450,000 investors with expert consultation in the acquisition of bullion. Contact us here.