This Week, the Fed Will Raise Short Term Rates

Does a Fed rate hike mean that you should sell gold? Not if history means anything. The rate hike is fully priced in. But that’s not all.

History shows that gold negatively anticipates rate increases and then responds positively when the rate hikes occur…just as we saw with the Fed hike of December 16, 2015, the first hike in nearly 10 years. That rate hike marked the beginning of a very strong rally in gold. The following charts show what happens to gold when the Fed raises rates:

In the 1970s, a rapidly rising price of gold went along with skyrocketing interest rates. In January of 1970, you could buy an ounce of gold for $36.56. By December 1979, the price was up to $593.84, a 16-fold increase. More than half of this gain occurred from 1977-1979 when the price rose from about $132 to $594 while the interest rate on the 1-year Treasury Note more than doubled from under 5% to almost 12%.

The logic behind the gold price rising during Fed rate hike cycles is that the market believes correctly that the Fed only raises rates when inflation is rising and the Fed is always behind the curve; it never raises rates faster than inflation because it does not want to depress growth. Yellen has made it very clear in her speeches that this remains the case; she does not want to choke the economy or risk financial markets especially with debt levels at record highs.

So, dear reader, as a holder of gold I do not think you should fear the Fed this week.