According to market analyst Jordan Roy-Byrne, history shows that regardless of the ongoing regime (inflation, disinflation or accelerating inflation), the price of gold often bottoms out at the start of the Fed’s rate hike cycle. In the analyst’s own words, the effects of the interest rate increase cycle on the gold market cryptocoin.com We have prepared for our readers.
“The emerging regime will determine the performance of gold”
Considering the five most important bottoms of the last 50 years (1971, 1976, 1985, 1999, 2016), we see that all but one coincide with the beginning of a new cycle of rate hikes. Historically, gold has tended to perform well (to varying degrees) amid rising short-term rates. However, unlike the 1970s and 1980s, the recent initiation of rate cuts has been a major catalyst for gold.
How gold performs after the first rally will depend on the type of regime that emerges.
In the chart below, I show the performance of gold following the start of the last three rate hike cycles. ‘Average 2’ assumes the start of the 2015-2018 cycle is December 2016 instead of December 2015. In most scenarios, a rebound followed by a correction occurs for the first 12 months.
Gold will continue to rise if there is rising inflation (as in the 1970s) or rising inflation expectations (as in 2005). However, if neither happens and the Fed is unable to continue the march, gold will not start the next leg higher until the Fed makes its final rise.
What path will gold follow during the rate hike cycle?
If we get more fiscal stimulus, that could put gold on the path that gold will rise during the rate hike cycle, as it did in the 1970s or mid-2000s. The market is not assuming any fiscal stimulus and is pricing the Fed to stand at around 1.50% in 2023.
If the Fed had to stop sooner, suspend increases or stop it altogether, it would mean more bull markets for gold.
In any case, the emergency view is on. While there is a risk that gold could drop, it could set up for a significant bottom in March or April, when the Fed could raise its first rate hike. However, you should put yourself in a position to take advantage and make sure you buy the right companies. I suspect March and April will be the time to buy future 5 and 10 dealers.
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