In only two days, on December 13th, the Federal Reserve will meet to discuss current interest rates. Right now, the chances of a rate increase are incredibly high. In fact, the chances of there not being an increase are placed at zero, as priced by the market.
The specific rates that will be discussed will be moving interest rates up 0.25%, making the new range 1.25%-1.50%. There is even a chance of two rate increases occurring, as 9.8% of traders are predicting. Either way, the final number will be announced on Wednesday at 2:00 PM EST.
As a gold investor, this raises the question of what we can expect to see from gold following a rate increase.
On this topic, much of the mainstream media is sticking together in touting the myth that rising interest rates have negative consequences for precious metals. This is evidenced in the article pictured, released by Bloomberg, a highly regarded news source.
This begs the question of where they are getting this information, because looking at the figures and statistics only shows positive results for gold following increasing federal interest rates.
We have provided two examples of past rate hike cycles in the graphs below.
The graph on the left is the most recent, depicting the time period of 2003 to 2007, during which the central bank increased rates by 4.25%, and concurrently, gold prices increased from $325 to $850.
The graph on the right shows a cycle that covers even a longer period of time, in fact, it shows the largest, longest interest rate hike cycle since the time of Bretton Woods. If you look, you can see that the rising interest rates helped gold break out of its price of $35 an ounce and hit the $850 mark, an increase of more than 2000%.
A Modern Example
Since the first federal interest rate at the end of 2015, gold has experienced a sequence of higher prices at each increase. The most recent increase in June of this year had gold at $1260 in the futures market following the decline of post-Fed trading on the same day that it was announced that they would begin normalizing the balance sheet through the sale of some of the Treasury holdings. So, in order for us to say that higher interest rates beget higher gold prices, gold will have to close on Wednesday at a value higher than $1260.
Below, you can take a look at the Fed Rate Hike to Gold Cycle Tracker we’ve created, which shows:
- The Top US 3-month treasury yields acting as a leading indicator, as they have been spiking in the time leading up to each rate increase.
- The exact date of each increase since 2015 marked with black arrows.
- The associated value of gold shown at the bottom.
This graphic also clearly shows the opposite of the media prediction that increasing interest rates lead to lower precious metals values. Additionally, strong rebounds are obvious in the time after every single increase since 2015.
Gold Prices and Rate Increases
Wrapping up, gold has been at a low point throughout the past weeks. And right now, many investors are selling their gold because they believe the media myth that says rising interest equals lower precious metals prices. But historically, these increases create a positive situation for gold investors, and even recent cycles have proven this.
The decision regarding the rate increases will be made on Wednesday, look out for whether gold will be aligning itself in another important low until then.
Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency, where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq.
Technical analysis shares many similarities with mapping: both are based on the observations of repeating and imbedded patterns in human nature.
His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is provided as a third party analysis and does not necessarily matches views of Bullion Exchanges and should not be considered as financial advice in any way.