Conventional wisdom holds that an interest rate hike in December will be bad for gold.
But will it?
There is actually evidence the opposite could be true.
Higher interest rates generally boost the dollar. This puts downward pressure on the price of gold. So, one would expect a rate hike to cause gold to tank. But over the last two years, the opposite has happened. In fact, we have seen double-digit increases in the price of gold after rate hikes.
So what gives?
The biggest factor is that we generally know the Federal Reserve is going to raise rates long before it actually acts. We’ve heard talk of a December rate hike since July. In fact, analysts say the likelihood of a quarter point December hike stands at 97%.
So, with several months to anticipate a hike, it is generally already baked into the price of gold by the time it happens. The market has been factoring it in all along. The Economic Times of India provides a succinct explanation of what has happened over the last two years.
This post was published at Schiffgold on NOVEMBER 17, 2017.