Fed Hikes Interest Rates - Metals Rise Again

On Wednesday the U.S. Federal Reserve hiked short-term interest rates for the 6^th time. This is since the present cycle of rising rates began in December 2015. The federal funds rate now stands at a 1.50% - 1.75% target range. As we predicted last week, precious metals indeed rose immediately following the rate hike decision. They were rising $23 in the two days after the meeting. Which was $1,346 as of the close of the spot market on Friday afternoon. For the week in sum, gold closed higher by 2.9% or $38. This phenomena of rising precious metals prices amidst rising interest rates stand in complete contrast to the scenario that the mainstream financial press typically states. They say it should happen amidst a period of rising rates. Specifically, the mainstream media continues to claim that as fed rates rise, gold prices should fall. What is the reason that mainstream analysts expect gold to fall amidst rising interest rates? The theory is that as rates rise, investors should have more incentive to keep funds in interest-paying accounts. Accounts like bonds or certificates of deposit (CD’s) or savings accounts. Gold bullion, it is argued, pays no interest, and should sell as rates rise. We need to look no further than the weekly financial press to see this form of the analysis presented to precious metals investors. For example, note the following article courtesy of MarketWatch.com.(March 1, 2018). It quotes: “rising interest rates would pressure the metal because bullion pays no interest.”  

Rising Rates Are Positive for Gold

Let's debunk this myth that rising interest rates are negative for precious metals. Let us examine two sample periods from history to show the actual correlation between the two asset classes:

• 1965 – 1980
• 2015 – present

1965 – 1980

To be as concise as possible: we will follow the unsustainable spending associated with both the Vietnam War and numerous domestic social programs of the 1960s. A rising interest rate was part of the environment over the next 15 years through 1980 and was the backdrop to the largest precious metals bull market in history. Indeed, between the late 1960s and 1980, gold broke the dollar standard at $35 per ounce. It also advanced over 2,000%. This was as the Federal Reserve increased interest rates from 3% to 17%. Were rising interest rates negative for gold? The evidence points to no.

2015 – Present

Next, let us examine the most recent period. The Federal Reserve has hiked rates six times since December 2015. Below we will show the price of gold. Note the exact corresponding date of each Fed rate hike:   In sum, from recent history, we see the six rate hikes since December 2015. This shows that gold has risen from $1,050 to $1,350 as this article is going to press. Rising interest rates are not negative for precious metals prices. Let’s dispel this myth once and for all.

Why do precious metals rise with rising interest rates?

To understand the trend of rising metals prices amidst rising interest rates, we must alter our perspective of the Federal Reserve. Especially from what is in the mainstream press. We must see that the Fed is a reactive, not a proactive institution. The Fed receives incoming data related to inflation, employment, and the solvency of its member banks. Then, it responds accordingly with monetary policy. The critical point is that the Fed responds after they observe incoming data. Fed governors have no crystal ball. Being a reactive institution, when would the Fed logically decide to raise interest rates? Only when it is forced to do so by rising inflation expectations from the market itself. In other words, the Fed just raises interest rates when inflation is becoming apparent in the broader economy. Gold is the ultimate protection from inflation over the long term. This is why gold tends to rise in a rising interest rate environment. The proof is in the charts. The highest period of inflation that the United States has ever witnessed was from the late 1960s through 1980. This was during which the consumer price index (CPI) rose to 14% year over year. It was the strongest precious metals advance in history.

Investment Implications for Precious Metals Investors

Interest rates and gold are now beginning to rise again simultaneously. It is uncertain why the mainstream media continues to suggest that rising interest rates are negative for precious metals prices. It may merely be one of those myths that take on a life of its own. Or, it may be a scare tactic designed to separate investors from their gold at critical junctures. Regardless of the cause, investors should check the actual proof from the history of rising interest rates and gold prices. Rising rates continue to be supportive of precious metals prices, not the opposite.

Christopher Aaron Bullion Exchanges Market Analyst Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. This is where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. 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 a third-party analysis. It does not necessarily match the views of the Bullion Exchanges. Readers should not consider it as financial advice in any way.

Bullion Exchanges is located at 30 West 47th Street in New York City’s Diamond District. We are open Monday through Friday 9 A.M. to 5 P.M. Or, online anytime at BullionExchanges.com.