Gold Bullish on Fed Hike

Gold reversed sharply lower after the Fed’s latest rate hike this week, on heavy selling from speculators and investors alike. Bearish sentiment flared on traders’ long-held belief that higher rates spell trouble for zero-yielding gold. But market history reveals the opposite, that Fed rate hikes are actually bullish for gold. This week’s Fed-induced gold dump is likely to flag gold bottoming just before a major new rally erupts.
There’s nothing gold-futures speculators fear more than Fed rate hikes. Their rationale is simple and logical. Gold pays no interest or dividends, it’s a sterile asset with returns solely dependent on capital gains. So as interest rates rise and boost yields for bonds and stocks, gold struggles to compete. Thus gold investment demand wanes as yield differentials grow between it and major competing asset classes.
This idea often leads gold-futures speculators, and to a lesser extent gold investors, to sell leading into and immediately after Fed rate hikes. Higher rates are viewed as gold’s mortal nemesis, lowering its relative attractiveness to investors. So this Wednesday after the Federal Open Market Committee hiked its key federal-funds rate for the fourth time in this cycle, gold plunged from $1276 to $1257 within a couple hours.

This post was published at ZEAL LLC on June 16, 2017.