Gold & Silver: The real story behind rising interest rates

NEW YORK (March 18) It was another volatile week in precious metals, with the price of Gold fluctuating $100/oz and Silver $1.74/oz. At the same time, the markets appear to have shifted from chasing geopolitical headlines to taking more of a focus on the economy and rising interest rates. One of the most asked questions I fielded on Wednesday was how will a hawkish Fed and the rate hike cycle impact the price of Gold? So, we at Blue Line Futures sat down and analyzed this relationship. We chose August 1971 as our starting point when President Nixon abolished the Gold standard, marking Gold at $35/oz. Below is a summary of our findings.

1972

The rate hike cycle arguable began in March 1972 when the Fed hiked by 25 basis points to 5.5%. Then two months later, in May, Gold rallied by 19.774% to $59.75. The Fed does an additional hike of 25 basis points in December.

1973

The Fed truly embarks on a rate hike cycle, adding another 25 basis points to 6.0% in January 1973. In February, Gold rallies 28.6% to $85.30 as Fed hikes 50 basis points to 6.5%. The Fed hikes to 11.0% to battle inflation between February and August. Gold trades to $126.40, nearly doubling on the year in June. Gold finishes 1973 at $112.30, +72%.

1974

Gold hits a high of $179.8 in April, with the Fed rate hike cycle peaking at 13% in July. The Fed later cuts rates to 8.0% in December, while Gold finishes the year at $186.7.

1977-1980

Inflation worsens, and Fed embarks on a massive tightening cycle, taking rates from 6.0% in 1977 to 20% in 1980. Gold rallies to a high of $875.

1988

Fed begins the hiking cycle, taking rates to 6.5% in March 1988 and 8.38% in December. Gold rallies from $403 to $502 during that timeline.

2004-2006

The Fed lifted off from 1% in June 2004 to 5.25% in June 2006. Gold went from $319 low in 2003 to a high of $645 in May 2006.

2016

The last hiking cycle began in December 2016. Gold bottomed the day after lift-off at $1046.

Summary

There was another lesson we uncovered which was the tone of the Fed and the state of the economy. Our analysis determined that if the Fed raises rates into a "declining growth" environment, this was "bullish" Gold. Conversely, if the Fed raises rates into an "accelerating growth" environment, this was "bearish" Gold.

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