5 analysts who say gold can advance in rising-rate environments
Do you think that rising interest rates are necessarily bad for gold? Think again. Listed below are five analyses that suggest gold prices can actually increase if the Federal Reserve lifts its federal funds rate this year.
Gross misinterpretation of the Feds April minutes have sent many investors into a tizzy, with stocks flirting once again with negative performance returns for 2016 before bouncing back this week.
But a review of recent and past analyses of golds performance during rising-rate environments suggests that the yellow metal can indeed increase in value along with rates. We saw the metal display unexpected resilience most recently this year, after the Fed raised rates in December and gold took off on a 20% run higher.
Falling behind the inflation curve: The conventional wisdom, of course, is that Fed tightening is bad for gold, mainly because higher U.S. rates can strengthen the dollar and increase the opportunity cost of holding commodities, wrote Julian Jessop of Capital Economics, who is predicting $1,350 gold this year. Prices have indeed faltered this week in the wake of the hawkish FOMC minutes. However, there is surely more to say than this; after all, gold and silver prices actually rallied in the weeks and months after the Fed first raised rates last December.
The upshot is that gold can still rally especially if U.S. wage and price pressures continue to build. Indeed, even our forecasts assume that the Fed will continue raising rates only gradually and to a still-low level by past standards, which may fuel concerns that it is falling behind the curve on inflation.
Gold can rise after a lag: And Jessops analysis echoes July 2015 research from HSBC showing that gold advanced after the Fed lifted rates on four prior occasions to its December rate hike.
History shows that gold prices also fall leading into a rate hike and generally rise, though sometimes with a lag, after the first rate hike. Investors are apt to unload gold in anticipation of tightening monetary policies. This negative pressure is sustained until the Fed announces a rate hike, which then eases the negative sentiment towards the yellow metal. This explains the subsequent rallies in gold that occurred shortly after the Fed announced the first rate hike in the last four tightening cycles.
Negative correlation inconclusive: And going further back in time, The Secular Investor blogger studied golds behavior during rate increases (1972-74; 1977-80; 1980-81; 1983-84; 1986-89; 1993-95; the late 1990s; and 2004-06) and verified that hikes do not definitively serve as a coffin nail for bullion prices.
His findings? How can any serious person conclude that gold will, without any doubt, trade lower in the next interest rate cycle? he wrote. Statistically, we just proved that it was the case in only 2 of the 7 instances.
1980s high hit amid rocketing rates: And Ben Kramer-Miller of The Cheat Sheet also likes golds odds during rate-hike periods. A rising Fed funds rate has, more often than not, coincided with rising gold prices, he noted. This is exemplified by golds bull market in the 1970s. From 1971 through 1974, the Fed funds rate went from roughly 5% to 10%, during which time the price of gold rose from $35 per ounce to roughly $200 per ounce. The Fed funds rate fell back to 5%by 1975 as the price of gold fell by nearly 50%. The Fed funds rate soared from 1977, peaking at more than 20% in 1980, and during that time frame, gold reached a peak of $850 per ounce. If we look at the modern-day bull market, we similarly see strength in the gold price as interest rates rose from 2004 through 2007, and we saw gold hit its major $1,000 per ounce peak just as the Fed funds rate began to plummet.
Higher rates bearish for stocks, bonds: Finally, Adam Hamilton of Zeal Research has performed an exacting analysis of golds correlation with Fed tightening and concluded: Golds mighty secular bull of the 1970s, which greatly dwarfed the 2000s one, happened during a time of high and rising interest rates!And then golds subsequent multi-decade secular bear in the 1980s and 1990s unfolded during a long span of interest rates relentlessly falling on balance.Gold rallying with rising rates and slumping with falling rates?Thats not in the script.
Rising and higher interest rates are actually bullish for gold for one simple reason.And that is they are actually very bearish for stocks and bonds.Gold is an alternative asset that shines the brightest when the conventional asset classes are suffering.And nothing pummels stock and bond markets like rising interest rates.That is the sole reason the Fed has been so darned slow in normalizing interest rates!
April minutes no hike guarantee: Therefore, gold investors might have nothing to fear but fear itself if the Fed carries through with its threatened rate hike this year. And that remains a big IF. Investors may be misjudging how hawkish the minutes from the Federal Reserve's April meeting really were, one Bloomberg analyst speculated at the start of a word-parsing exercise of the latest Fed minutes.
Indeed, contrarian economist Marc Faber is just one of numerous analysts who think the Fed is bluffing about a June rate hike. My view is that in June they will not move, that they will not increase rates. And that the market will begin to perceive that the Fed wants to support asset markets, which they have stated on numerous occasions before, and that gold, which from now on may correct about 5% or so, will start to move up again.