Do Higher Rates Really Kill Gold?
Following what many interpreted as a hawkish shift from the Fed, we want to reiterate our view on what this means for gold.
The widely held belief that higher nominal rates are inherently negative for gold beyond the immediate term is, in our view, incorrect, based on the key lessons of the 1970s, a period bearing an eerie resemblance to today.
Gold prices rose alongside rising nominal rates throughout most of that decade. Corrections only occurred when the Fed hiked into a recession, with gold falling 19% on average, and even then prices recovered within about four months. The gold bull market was only halted twice in that era, in 1975 to 76 and post 1983, both periods defined by post-recession conditions with a perceived Fed victory over inflation and above trend GDP growth, above 5% in 1976 and above 4% average from 1983 to 1993.
We seem to be facing the opposite setup today.
As we outlined in our detailed report this month on the parallels between today's CPI trajectory and the late 1970s, we may currently be at the equivalent of 1978, the period immediately preceding the final, largest blow off top in both inflation and gold prices.
US CPI Inflation and forecasts (%) if historical correlation continues to hold, and historical gold price nominal ($/oz)
Source: Asymmetric Research, BLS, Macrotrends
It is important to note that the system’s ability to withstand higher interest rates is significantly more constrained today than in the 1970s. This is primarily because Federal debt as a percentage of GDP is 3-4 times higher now, and the budget deficit as a share of GDP is also larger, despite interest rates in the 1970s being much higher.
Reminder of our key takeaways from the 1970s on gold
- Gold rose nominally c5x from 1973–1983 vs. S&P +50%
- Gold prices advanced as inflation printed higher
- Four stagflationary/recessionary episodes: growth/inflation troughs in 1970 (0%/6%), 1974 (-1%/11%), 1980 (-0.3%/13%), 1982 (-2%/6%). Notably, 1970, 1974, and 1980 saw inflation hit new cycle highs; 1982 held elevated at 6% after peaking at 13% in 1980.
- Average recession duration: c12 months
- Fed continued hiking rates into recessions, often 4 months after onset
- Gold made new nominal highs entering recessions in most cases (except 1982, after 1980 peak)
- Meaningful declines occurred only after the first intra-recession rate hike
- Average -19% drop in first 3 months of recession, followed by full recovery in c4 months
- Bull runs ended in 1975–76 and post-1983, amid post-recession periods of perceived Fed success on inflation plus above-trend GDP (>5% in 1976, >4% average 1983–1993)
Our base case sees limited downside to gold prices from here
We continue to view market driven sell-offs in gold as buying opportunities. Our base case remains that we are close to the floor: around $4030/oz, as derived below for the midway between the median of the worst gold price corrections in the past 30y and 50y+ (since 1974). The 50y+ median would indicate -11% downside to $3640/oz.
Median of worst gold price corrections in the last 30 years and 50+ years, and implications for reasonable gold price floor and remaining downside to spot.
Source: Asymmetric Research
Gold equities discounting...
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This article is based on research originally published on Asymmetric Research. For our full gold equities analysis, valuation work, and current positioning, visit: asymmetricresearch.substack.com