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Gold During Fed Tightening Cycles

10 Aug 2018 - Archive

Recently, American central bankers from the Federal Reserve have given indication that they plan on raising interest rates this year.

 

This step would be in stark contrast to other central banks around the globe, which have made moves towards monetary policy easing.

 

The list of easing moves includes the European Central Bank buying bonds (known as European-style quantitative easing), the People's Bank of China lowering its interest rate and making lending money-lending less stringent, and the Russian Central Bank lowering its interest rate.

 

The counter-trend move by the American central bank poses the question -What will an interest rate hike in the U.S. mean for the price of gold?

 

The following is a look at what the price of gold has done during the past 13 U.S. Federal Reserve tightening cycles.

 

The vertical axis is the percentage gain (or decline) in the price of gold. The horizontal axis is the number of days the Federal Reserve tightening cycle lasted.

 

Each line represents a given tightening cycle, labeled by the month in which the tightening cycle lasted.

 

On average, the price of gold appreciates 9.6% during a tightening cycle. The average cycle lasts 229 days. 

 

What does this mean?

Essentially, if history is any guide, and we know sometimes it is not, the typical Federal Reserve tightening cycle lasts between 89 and 432 days (vertical, gray-shaded bars).

Over this time, the typical return to holders of gold is from -2.9% to +12.1%, with an average of 9.6%.

 

This essentially indicates that a pending Fed rate hike is probably positive for gold holders, contrary to popular belief.

 

Comparing

The 9.6% average return for gold does not give one a frame of reference.

 

How does, for example, the S&P 500 perform during Federal Reserve rate hiking cycles?

 

The average return of the S&P 500 during Fed rate hiking cycles is about 9.1%, indicating that gold has a slightly higher average return typically than equity markets do during Fed tightening cycles. 

Conclusion

Overall, the U.S. Federal Reserve continues to give indications that it plans to raise interest rates later this year.

 

If the past performance of gold during Fed rate hiking cycles holds, this is probably a positive signal for the price of gold.

 

During the prior 13 Federal Reserve tightening cycles, the price of gold gain 9.6% on average over the typical 229 day tightening cycle (229 is the average). 

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