Gold: Fed’s First Rate Hike In 9 Years Doesn’t Have To Be Negative For Gold
In less than a week the market will be digesting the results of the latest Federal Open Market Committee (FOMC) meeting.
The expectation is that the central bank will signal that it is preparing to raise the Fed fund rates in September and while many analysts are expecting gold to drop on the announcement, analysts at Macquarie aren’t completely convinced.
They agree that theoretically, gold should drop on the news that interest rates are going higher because higher yields increases the metal’s opportunity costs. Also, higher rates would be bullish for the U.S. dollar and therefore negative for the yellow metal.
However, in a research note released Tuesday, the Australian-based bank said that historically gold prices have rallied on the news of an interest rate hike.
“On the 31 occasions the Fed has raised rates since 1994 (the date after which it first made its decisions public) gold has gained slightly more often than it has fallen in price,” they said in the note.
The last time the central bank raised interest rates, June 29, 2006, they said that gold rallied 3% in the day. Of course they admit that this result was an outlier.
“It might be argued that the rate hike in June 2006 was the culmination of a rate tightening cycle, and indeed at the time press reports attributed a rally in equities and gold to a sense of relief that the rate hikes were now over. A rate hike in September 2015 will be the start of a cycle,” they said. “However even if we separate the rate hikes at the end of a cycle from those at the start of a tightening cycle there seems no discernible impact.”
Looking back at previous tightening cycles, Macquarie did not find a strong relationship of any kind between gold price and interest rates.
One of the reasons why gold might end up rallying on September’s expected rate hike is because investors have been expecting it since 2013 when the central bank first started hinting at normalizing interest rates.
“The gold price today is already over one-third lower than its 2011 peak, and much of the decline appears to have stemmed from a dawning realization in early 2013 among bullion investors that the direction of Fed policy was not always going one way,” they said. “It is now 2015 and that we can talk about a ‘consensus’ on when the Fed will raise interest rates suggests much of its impact should already be ‘in the price.’”
Another benefit for the gold market is that although rates are moving higher, indication from bond yields show that expectations remain that rates will remain below historical norms. Macquarie added that they expect 10-year treasury yields to peak at 2.7% as the U.S. economy continues to underperform.
Finally as interest rates move higher, Macquarie is also expecting the central bank to be behind the curve and unable to keep up with inflation expectations, meaning that real interest rates will be low or even negative.
“It is noticeable that gold’s all-time peak in September 2011 came when a simple measure of real rates – the Fed funds rate less inflation –was at its most negative,” they said.
By Neils Christensen |
