For the first time since the onset of the credit crisis, we believe the market is beginning to price in a higher probability that the Fed is finally in the position to raise rates both continually and more frequently. The prevailing view is that central bank rate hikes are the natural enemy for gold prices. Analyzing rate cycles and the gold price from 1971, we find that gold tends to do better in hiking-cycles than cutting-cycles. We find that the positive performance during hiking-cycles can be explained with the three drivers identified in our gold price framework. Given the outlook for these three drivers, gold will likely do well over the coming quarters even as the Fed keeps raising rates.
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In recent years, the Fed has persistently indicated that it was going to hike rates several times per year over the next few years until rates are ‘normalized’. So far, the Fed has fallen short on delivery, having hiked only once in 2015, once in 2016 and so far twice in 2017. While that doesn’t sound like a lot, compared to its peers, the Fed is a hawk.
This post was published at GoldMoney on November 21, 2017.