Gold can do well even when US rates head higher

As the most venerable financial asset, gold staggers under the weight of a fair bit of folklore and received wisdom.

And one bit of such wisdom, which has stymied its progress this year, is that gold doesn’t do so well when the Federal Reserve is raising US interest rates.

The thinking behind this is reasonable enough. When the Fed hikes, the yields on safe assets like US Treasuries go up as well, which makes them look more attractive than gold, which is safe too but yields nothing. Moreover, an inflation-fighting Fed (not that there’s much inflation to fight), means investors have much less need of inflation hedges, something gold is often held to be.

Taking a further step back, rising interest rates are a sign that an economy is doing reasonably well, so investors have much less need of haven assets, and can afford to go out into riskier markets with confidence.

However, as the chart below from zerohedge shows, the received wisdom isn’t really worth much of a bet.

Gold can in fact thrive when the Fed funds target rate is rising, and can lose out when it isn’t.

There’s clearly more at work here, and, with the Fed now all but certain to be alone among the major economies in raising rates for the foreseeable future, the oldest asset of the lot may not be in quite as much trouble as it appears to be in.

 

Republished from news.markets: http://news.markets/commodities/7302-7302/