The Fed is expected to raise interest rates this month. Contrary to popular belief, tightening is not necessarily negative for gold, according to veteran analyst Arkadiusz Sieron. The analyst looks at tightening cycles from a historical perspective. The seminal writing of Arkadiusz Sieron cryptocoin.com We have prepared for our readers.
How did gold perform in tightening cycles?
March 2022 – The Fed is expected to end quantitative easing and raise the fed funds rate for the first time amid recovery from a pandemic crisis. After takeoff, the Fed will likely start shrinking its huge balance sheet and raise interest rates a few more times. Thus, tightening of monetary policy is gradually becoming a reality. The golden question is: How will the yellow metal behave under these conditions?
Let’s look at the past. The last tightening cycle of 2015-2019 was quite positive for gold prices. The yellow metal rose from $1,068 to $1,320 during this period (I mean monthly averages), gaining about 24% as the chart below shows.
What really matters is that gold hit bottom in December 2015, a bullish month. So if we see a repeat of this episode, gold should leave $1,800 and head north to the heavenly bullland. However, while real interest rates peaked in December 2015, the US dollar reached its local peak in January 2016. These factors helped gold prices skyrocket a few years ago, but this time they don’t have to re-emerge.
Let’s dig a little deeper. The previous tightening cycle took place from 2004 to 2006, and despite the Fed raising interest rates by more than 400 basis points, today was also a great time for gold, something unthinkable. As the chart below shows, the price of the yellow metal (monthly average) has increased from $392 to $634, over 60%. Just like today, inflation was on the rise then, but it was also a period of great weakness in the US dollar index, a factor that is currently missing.
Let’s go a little further back. The Fed also raised the federal funds rate in the 1994-1995 and 1999-2000 periods. The chart below shows that these situations are fairly neutral for gold prices. In the first, gold traded sideways, and in the second, it fell, rose and turned bearish. More importantly, just like in 2015, the yellow metal bottomed out soon after takeoff in early 1999.
There were two main spin cycles in the 1980s, and both were clearly negative for the yellow metal. In 1983-1984 the price of gold fell 29% from $491 to $348 despite rising inflation, while in 1988-1989 it dropped another 12% as you can see in the chart below.
Finally we traveled back in time to the Great Stagflation period! In the 1970s, the Fed’s tightening cycles were generally positive for gold, as the chart below shows. From 1972 to 1974, the average monthly price of the yellow metal rose from $48 to $172, or 257%. The tightening between 1977 and 1980 was an even better time for gold. Its price jumped from $132 to $675, or 411%. However, monetary tightening in 1980-1981 proved less positive as the yellow metal later dropped to $409.
Analysis of the effect of cycles on gold
What are the implications of our historical analysis for the 2022 gold market? First, the Fed’s tightening cycle doesn’t have to be bad for gold. In this report, I examined nine tightening cycles for the gold market, four of which are bullish, two are neutral, and three are bearish. Second, all negative events occurred in the 1980s, while the last two cycles of the 21st century were positive for gold prices. It bodes well for the 2022 tightening cycle.
Third, the key, as always, is the broader macroeconomic context. That is, what happens in the US dollar, inflation and real interest rates. For example, in the 1970s the Fed was raising interest rates amid rising inflation. However, in March 1980 the annual CPI rate peaked and a long period of disinflation began. Therefore, tightening cycles were generally positive in the 1970s and negative in the 1980s.
So, on the surface, the current tightening, accompanied by high inflation, should be bullish for gold. However, inflation is expected to peak this year. If this happens, real interest rates could rise even higher, putting downward pressure on gold prices.
Please note that the actual federal funds rate is record low. If inflation peaks, the gold bulls’ only hope is either a bearish trend in the U.S. dollar (between the global recovery and the ECB’s monetary policy tightening) or interest rates tracked, given that the Fed’s tightening cycle has historically been followed by an economic slowdown or recession. There will be a dovish change in market expectations about the road.
Contact us to be instantly informed about the last minute developments. twitter‘in, Facebookin and InstagramFollow and Telegram and YouTube join our channel!
Disclaimer: The articles and articles on Kriptokoin.com do not constitute investment advice. Cryptokoin.com does not recommend buying or selling any cryptocurrencies or digital assets, nor is Kriptokoin.com an investment advisor. For this reason, Kriptokoin.com and the authors of the articles on the site cannot be held responsible for your investment decisions. Readers should do their own research before taking any action regarding the company, asset or service in this article.
Warning: Citing the news content of Kriptokoin.com and quoting by giving a link is subject to the permission of Kriptokoin.com. No content on the site can be copied, reproduced or published on any platform without permission. Legal action will be taken against those who use the code, design, text, graphics and all other content of Kriptokoin.com in violation of intellectual property law and relevant legislation.