[DEBUNKED] Rising Rates Are Bearish for Gold

Matthew Carr By Matthew Carr, Emerging Trends Strategist, The Oxford Club

Metals

There are many market maxims…

“Sell in May and go away.”

“As January goes, so goes the year.”

“The trend is your friend.”

Most investors blindly accept them as truths.

No one questions their validity or does the research to see whether they’re true.

But that’s what I’ve spent the majority of my career doing: proving that these market maxims and Wall Street doctrine are false.

Today, we’re going to debunk the long-held belief that rising interest rates are bearish for gold prices.

The first quarter recently ended. And some of the winners and losers were surprising…

Crude, gasoline and natural gas were dragged down in the quarter. And for the most part, all the damage took place in March.

But since April, crude has surged. (I discussed the reasons why here.)

At the other end of the spectrum, precious metals such as silver, palladium and gold were some of the top performers for the quarter.

That’s surprising for a few reasons…

The markets performed well despite volatility, the strengthening of the U.S. dollar and rising interest rates.

That spits in the face of a widely held belief: The Federal Reserve’s rate hikes are bearish events for gold prices.

It’s a pretty basic theory: Gold pays no dividend and offers no yield. In a rising-rate environment, investors liquidate their holdings in precious metals and move to more attractive assets like bonds or even money market funds.

It sounds so smart and logical.

So with the Fed raising rates for the first time in years, the expectation is that gold should struggle as money flows out.

But the historical realities don’t match that belief… not even remotely.

The gold price boom that began in the 1970s and continued into the early 1980s occurred in a rising-rate environment.

 

Gold went from $50 per ounce to $850 per ounce during that time, as rates skyrocketed into the double digits.

For the next couple decades, as rates moved lower, so did the price of gold.

Gold bottomed in April 2001 before going on a decade-long bull run. By August 2011, its price had increased 447%. During that time, there were three rate hikes.

During the 18 federal fund rate hikes from 1976 to 2006, gold largely performed well – particularly over the long term.

Gold investors are always the first to point out that, since 2000, the S&P is up 123.01%, including dividends.

Also since 2000, gold is up 345.92%.

And historically, gold has performed well shortly after an interest rate hike.

In fact, it’s averaged a one-year return of 10.38% following a rate increase…

In eight of those instances, the price of gold declined one year out. It rose in nine instances and was flat in another.

Before the Fed rate increase in December last year, gold was down. But since then, the price of gold is up almost 9%.

Gold also dipped in expectation of the rate hike in March… but it’s up 5.3% since then.

So the Fed’s impact on gold prices in both the short term and long term isn’t negative. In fact, quite the opposite is true.

Now, I’m no gold bug. But I understand the value of precious metals investing. And I’m always in pursuit of the truth.

I adhere to a basic tenet when it comes to investing: People lie. Numbers don’t.

It’s clear you don’t have to worry about the Fed when it comes to gold prices.

Good investing,

Matthew

P.S. I’m always looking for more maxims to analyze. What typical investing rules have you been told? I’d love to dig into them to see how valid they really are. Submit your market maxims by emailing me at mailbag@oxfordclub.com.