The research team at ANZ points out that they have recently revised their forecast for the US federal funds rate and now expects the Fed would raise rates again by 25bps in June and September, but they believe this won’t be a major hindrance to higher gold prices.
“In fact, history shows that a slow and gradual rate hike cycle is beneficial for gold. Over the past seven rate-hike cycles (going back to the 1970s), gold has pushed higher in all but one case.”
“Moreover, gold has outperformed in the cycles where interest rates were increasing relatively slowly.”
“Analysis shows that in the majority of cases, where gold has pushed higher over the subsequent 12 months (after the first rate hike), the rate hikes have been relatively gradual.”
“The level at which gold entered these cycles is also critical. If prices are already under pressure leading into the first rate hike, the performance subsequent to that tends to be great. In the current cycle, gold did fall below USD1100/oz in the weeks preceding the first rate hike in December 2015. However we also saw gold suffer a heavy fall leading into the March rate hike earlier this year, with the price briefly dipping below USD1200/oz.”
“The reasons for the positive performance of gold during rate hikes are various. But in general, we believe rising interests are more damaging to stocks and bonds, leading to a surge in investment demand led by portfolio diversification.”