Are Rate Hikes Bad For Gold?

Tyler Durden's picture

Submitted by Mike Shedlock via MishTalk.com,

Here are two different looks at Fed rate hikes since Volcker. The charts are the same, but one presentation is a lot funnier than the other.

fed-funds-rate1

the above image from the New York Times article A History of Fed Leaders and Interest Rates.

Here’s an alternative view courtesy of @HedgeEye.

fed-rate-hikes-hedgeye

Let’s take the fist chart and see what correlations exist between rate hikes and the US dollar index.

Rate Hike Cycle vs. the US Dollar

fed-funds-rate-vs-dollar-index

Conventional wisdom suggests rate hikes will support the US dollar.

US Dollar Conventional Wisdom vs. Rate Hike Reality

  1. Currency trends seem to linger in both directions at the end of the rate hike and rate cutting episodes.
  2. Dollar cycles have run about 7.5-8.5 years. If the pattern hold, this latest strengthening may soon be over, if it’s not over already.
  3. The dollar peaked in February of 1985, long after the Fed stopped hiking.
  4. The Dollar fell in 1984, just as Fed embarked on 17 consecutive hikes. The dollar then continued its decline for several more years after the Fed paused. At that time, hyperinflationists came out of the woodwork, predicting a dollar collapse. Three years later the dollar tested the low then blasted higher well before the Fed started to hike.

British Pound 8-Year Cycle

pound-8-year-cycle

The above chart from You’ve heard of Kondratiev waves – now meet the Frisby flux, the pound’s eight-year cycle by Dominic Frisby.

Rate Hikes Bad for Gold?

Conventional wisdom also says rates hikes are bad for gold. Let’s take a look.

rate-hikes-gold

How’s that conventional wisdom doing?

Why is it that nearly all of mainstream media preaches that rates hikes will strengthen the dollar and rate hikes will be bad for gold?

Gold Does Well in These Environments

1. Deflation
2. Hyperinflation
3. Stagflation
4. Decreasing faith that central banks have everything under control.
5. Rising credit stress and fear of defaults

Gold Does Poorly in These Environments

1. Disinflation (1980 to 2000 is a perfect example. There was inflation every step of the way but gold got clobbered).
2. Increasing faith in central banks’ ability to keep things under control (Mario Draghi’s “Whatever it takes” speech triggered a prime example)

Gold does worst in periods of prolonged disinflation and in periods of rising faith in central banks.

Moments in Gold History

  1. On August 15th, 1971 Nixon closed the gold redemption window. Gold was $43.15 an ounce. Stagflation ensued. Gold soared.
  2. On January 21, 1980, gold closed at $850 an ounce. That was the market top for decades.
  3. US inflation peaked at 14.8 percent in March 1980. The Federal Reserve board led by Paul Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. It was not the rate hikes directly that led to the plunge in gold. Rather, the rates hikes convinced the public and the markets that the Fed had everything under control.
  4. On May 7, 1999, the Bank of England announced plans to dump its gold for other assets. The price of gold was at US$282.40 per ounce. The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999. With many gold traders shorting, gold reached a low point of US$252.80 on 20 July. This is frequently called “Brown’s Bottom” after Gordon Brown, then the UK Chancellor of the Exchequer.
  5. Between 2000 and 2006 gold soared in conjunction with a massive housing bubble as the Greenspan Fed hiked 17 consecutive meeting at “pace that is likely to be measured”. The Housing bubble burst in 2007.
  6. On April 17, 2008, gold touched $956.20, then collapsed along with everything else in the great recession.
  7. On November 13, 2008, gold touched $698.20. That local bottom has not been approached since.
  8. On August 23, 2011, Gold peaked at $1923.70 with a European Debt Crisis underway and the Fed involved in a series of QE actions.
  9. On July 26, 2012, Mario Draghi made his famous “Whatever It Takes” Speech. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”  Gold closed at $1614.
  10. On September 6, 2012, in a further attempt to calm the European Debt Crisis, the ECB announced free unlimited support for all eurozone countries involved in a sovereign state bailout/precautionary program from EFSF/ESM, through some yield-lowering Outright Monetary Transactions (OMT).
  11. On December 17, 2015 gold touched $1046.80. At that time, numerous people emailed that gold would fall to $800, then $600. Some suggested it would fall all the way back to $250.
  12. Once again writers want you to dump your gold because of the dollar and rate hikes.

Conventional Wisdom Roundup

Gold does not necessarily rise and fall with interest rates, jewelry demand in India, or any other widely believed nonsense. Rather, gold has moved in conjunction with perceptions as to whether or not the Fed and central banks have everything under control.

If you think everything is under control, and do not want insurance against a currency crisis or another debt crisis, then dump your gold.

If you believe as I do, that everything is not under control, or if you want some insurance, then take a position in gold.

Either way, stop listening to conventional wisdom regarding gold. The charts show how laughable that wisdom is.

Related Articles

  1. Misunderstanding “Peak Gold”; Gold About to Run Out?
  2. In an interview on Gold Switzerland Robert Blumen discusses “What’s really key for the price formation of gold?

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Bill of Rights's picture

Sideways all day now this ha ha ha you cant make this shit up folks

 

https://s3.amazonaws.com/tradingview/snapshots/v/VtjmgYM7.png

tmosley's picture

Gold is money. Money is a claim on human labor. Any environment where a unit of human labor produces more goods and services over time is good for gold. Any period where it produces less is bad for it.

The last 200 years have been very good for productive power of human labor. The only reason gold has fallen at any time therein is through artificial intervention. The reversal of those interventions has been violent, as this one will be.

cheka's picture

bad for gold once 30 yr is double digit yield

Notveryamused's picture

By the gold vs. M2 money supply chart, gold should be $1800-2000.
https://www.indigopreciousmetals.com/media/wysiwyg/Article-images/Gold_a...
Fed raising rates is an acknowledgement of some inflation concerns from large increase in money supply which should see gold catch up to that long term trend line at least. (Even though it should be valued much higher)

xythras's picture
xythras (not verified) tmosley Feb 23, 2017 5:41 PM

.

NugginFuts's picture

been watching that myself.... how does one explain gold and silver rising, yield dropping, dollar dropping, stimulus and tax cut expectations dropping, and miners only up a few points? In a normal market, NUGT and JNUG would have double digit growth today. 

Love it if anyone could explain it. 

Bill of Rights's picture

Especially a fucken 3X ETF....I'm open for discussion..

NugginFuts's picture

hey here's a theory - is this a "buy the rumor, sell the news" kind of situation? 

Gold...Bitches's picture

Old Uncle Larry as a young post doc showed how it works by resolving Gibson's paradox.  Its a function of REAL interest rates after costs of inflation.  In a real positive rate environment gold falls.  negative it rises.

 

As for the shares - good luck explaining that one with all the algos and everything else.

 

http://www.nowandfutures.com/download/Gibson'sParadoxAndTheGoldStandard_gibson.pdf

fahmahbob's picture

This has a pretty good discussion of why JNUG/NUGT should be avoided:

https://www.youtube.com/watch?v=AmMIAEhC4xc

 

NugginFuts's picture

hey, if those guys should be avoided, so should GDX and GDXJ, RING, SGDM, basically any miner ETF. NONE of them saw a corresponding jump in valuation today that would correlate to the jump in silver and gold. Gold goes up nearly $17 and GDX moves all of four cents (0.16%)? Nah, I don't think so. Something smells funny.

NoWayJose's picture

The only thing bad for gold are flying monkeys carrying hammers!

World-Gone-Mad's picture

No. There are times this is true, but not always. Too much intervention in all markets. Gold will likely keep rising.

lasvegaspersona's picture

Gold seems to be locked into the movements of the entire commodity complex for now. When cotton, copper and silver rise some trader is going to trade with that in mind...in fact thousands of traders will do the same.

As long as gold is viewed as a commodity it will not likely 'breakout' and rise by itself.

If/when gold is seen as a reserve on a par with treasuries or should treasuries beging to fail, then an action by central banks could cause gold to find a whole new way of finding value....lots of value.

Quantum Bunk's picture

No they are good. From 2004-2006 Greenspan rasied rates. Gold shot up

Consuelo's picture

 

 

I bit my (gold) coin today - for good luck.

 

Now, what do I have...?

Consuelo's picture

 

 

Dude - 

 

I didn't bit into a piece of Tungsten...  

barysenter's picture

Depends who slept with it last.

JTimchenko's picture

I think rate hikes are entirely irrelevant.

JTimchenko's picture

I think rate hikes are entirely irrelevant. Here's why...

Conventional wisdom doesn't mean anything because gold is a highly manipulated market, tightly controlled by central banks who want to prop up the paper money their associated treasuries print. But, none of Shedlock's BS matters either.

The big banks, closely connected to the Federal Reserve, ECB, Bank of England and Bank of Japan have defacto control over all markets because of their access to unlimited window loan money from the Fed, BofE, ECB, etc. But, unlike stocks, bonds, and other paper assets, gold is ultimately deliverable. That means that they can only manipulate it (on the downside) as long as the US or European governments supply gold to back up the paper manipulations.

The Whistleblower, Andrew McGuire, recently said the London gold market is about to implode from deficiencies of supply. Avery Goodman wrote a series of incredibly prescient articles, starting after the November election, implying that the reason is that the Trump administration is cutting the banksters off from the US gold reserve.

Gold is on its way back upward -- big time! Read Goodman's articles. He's been on the money almost to the day in predicting price and timing. His most recent post is here, but read the previous ones too. They're definitely worth the time.

http://averybgoodman.com/myblog/2017/01/29/comex-physical-gold-deliverie

After you read what Goodman has to say, read McGuire's piece:

https://www.tfmetalsreport.com/blog/8172/guest-post-heightened-risk-gold

Just put two and two together, and you'll understand the entire gold market.

SeuMadruga's picture

Thanks for the links (btw, the last one is not working).

Womb Service's picture

Shedlock doesn't believe there is any manipulation of the metals whatsoever. His charts and numbers are meaningless. He is meaningless.

Sooner's picture

Nice article.  Thanks!

jamesmmu's picture

Stop Listening To Conventional Wisdom Regarding Moments in Gold History As Investors Flock To Supercharged Gold Bet That's Returned 180%

http://investmentwatchblog.com/stop-listening-to-conventional-wisdom-reg...

SJEqualizer's picture

Nothing is 'bad' for gold, gold don't give a shit.  What's good for younger stackers is paying fewer Monopoly dollars per ounce...for the time being.

Obviously not as helpful for older stackers since they might have to start liquidating.

P Rankmug's picture

There's not necessarily any connection between the price of gold and the author's Moments in Gold History.

How the dollar price of gold is determined.

http://manonthemargin.com/the-dollar-price-of-gold/

kahplunk's picture

Gold is going up no matter what Trump cannot fix this sinking ship that opportunity was 8 years ago. Ohbummer fucked us right in the chilly ring. city's are a  mess. Everyone is on  Drugs and no end in sight.

GoldHermit's picture

It's the real rate of interest that will have the affect.  They are one of the drivers of commodity prices.  Buy physical over time and for God's sake don't keep it in a bank!  Use a storage service.

Farmer Joe in Brooklyn's picture

I use Farmer Joe's Home Storage Solutions...top-notch safes, snarly dogs who don't take well to unwanted visitors, and a family trained to use the various firearms readily available. 

Any other storage service is not to be trusted in true times of need.

If you can't hold it (immediately), you still don't own it.

Farmer Joe in Brooklyn's picture

Rate hikes will be great for gold...!!

If rates go up even 50-100bps, you will have a collapse in real estate and the stock market will come tumbling down with it. Bye bye pension funds and insurance companies. Bye bye banks.

Financial chaos good for gold.

If (when) central banks unleash the biggest bazooka of QE ever imagined to attempt to arrest the collapse, they will finally let the hyperinflation genie out of the bottle...also good for gold.

Deflationary destruction or hyperinflationary melt-up...all roads lead to gold...

 

JLM's picture

Gold is trading 1:1 with USD/JPY currency pair for quite a while now.  Rigged that way by the powers that be.  Negative real interest rates also move gold.  I am long gold stocks since that massive 90% 5 year sell off that ended last year.  No where to go but up from that low for the next few years. MHO

Scrooge_McDuck's picture

I would say gold is most correlated to money supply over long periods of time. Since 1971 M2 is up 5.31% annuallized, Gold 6.29% and Silver 4.32%. That's why/how gold retains its purchasing power over time, it's the inverse of dollar dilution. In the short term it gets over/under valued, but over time it will go with the money supply. 

 

Here's a chart of PMs/M2.

 

https://twitter.com/johnny_1205/status/832752589485731841/photo/1

bardot63's picture

How would anyone know what the free/fair paper dollar/fiat price of gold is, since it is manipulated by central banks through bullion banks to protect paper fiat debt tickets.  Alleged, demonstrated, proven and admitted -  see Douchbank for further info.

Charts and graphs are worthless when bullion banks can dump 300 trillion in paper, imaginary gold onto the market anytime they like. 

Conax's picture

The Bernank and mr Yellin look like the financial midgets they are in that chart.

No guts, no glory. Just weakling sockpuppets. Gold and silver will do great when they finally separate from the paper.  When the phyzz is gone, look out.

Hongcha's picture

Yes Conax.  I think the physical will dry up.  If the P.R.C. wants Au to go up, all it needs to do is suggest its 100,000,000 millionaires buy gold.  They will come to our shores and vacuum up the bullion tout de suite.

Au acting very well this year.  Dips getting bought, even with the 'rate hike' overhang.

Seasmoke's picture

Paul Volker always says his regret is letting price of Gold get so high. The Federal Reserve knows. Hyperinflation and Gold is $50,000USD.

bardot63's picture

Shedlock is, has been, and maybe always will be in denial that bullion banks manipulate the fiat paper price of gold and silver to protect the image of paper money.

mosfet's picture

The last 2 rate hikes have been the singular cause of the last 2 big rally in PM's but Gold always dips to bargain levels before FOMC's.  Same is true right this moment - Now til March 14th Gold will fall.  If Ms. Felon Doesn't hike on March 15th it'll bounce up nicely and resume upward trend to $1300oz (and DOW hits 22K) by May.  If she Does hike then DOW corrects a bit and Gold $1400 by May.

kenny500c's picture

Short term dollar rates have to be 2% above the rate of inflation to quell the POG. 

So we would need 4% O/N rates to keep a lid on the gold price.

 

 

Trubador's picture

Up until the turn of the century, the S&P 500 was the reliable go-to for stable and steady increases over time. BUT, since Jan 1, 2000, Gold and Silver have out-performed the S&P.

 

S&P 500 on 1/1/00 = 1425.59

S&P 500 on 2/23/17 = 2363.81

That's only a 66% increase in value in 18 years.

 

Silver on 1/1/00 = 5.34

Silver on 2/23/17 = 16.94

Silver increased in value by 217% in 18 years

 

Gold on 1/1/00 = 288.50

Gold on 2/23/17 = 1188.30

Gold increased in value 312% in 18 years.

 

That's a compound interest rate over 18 years of 3.45% for the S&P 500, 6.6% for Silver, 8.2% for Gold.

Justin Case's picture

If you measure the Dow against the price of gold, the Dow comes in at approximately 18.1 ounces of gold. The Dow reached its peak, measured in gold, in 1999, at 49 ounces. Since then, the Dow has fallen more than 62%.

If valued in dollars, the Dow would seem to have done quite well for many years, the dollar’s value has steadily gained against other currencies. However, the dollar is only doing well against other currencies, because many other currencies are in trouble and may soon collapse. The dollar is therefore just the best looking horse in the glue factory. If you compare the 2017 Dow to the 1999 Dow in 1999 dollars, the drop would be 80%. In this light, the present glow of the Dow dims considerably.

Justin Case's picture

Gold rose from $35 to $197.50 between 1970 and the end of 1974, an increase of more than four times. During that period, as mentioned above, the Bank of England’s base rate rose from 5% to 13%. The Fed’s discount rate was 4.5% in 1972 and rose to 8% in August 1974. So, a rising gold price was accompanied by a rising interest rate, contradicting the conventional wisdom of today. Gold went on to hit a peak price of $850 at the afternoon fix of 21 January 1980, when the Fed’s discount rate was at an elevated 12%.

The current belief that rising interest rates are bad for gold was disproved by those events. The reason gold rose had little to do with interest rates, and everything to do with accelerating price inflation. The only way a rising gold price could be halted was to raise interest rates high enough and sharply enough to collapse economic activity, which is what Paul Volcker did in 1980-81. In other words, until the Fed abandons all pretentions to supporting economic growth, people will continue to increase their preferences for owning goods over holding dollars, thereby continuingly reducing its purchasing power.