As the world awaits the Fed decision, what happened to the price of gold during the last rate hike cycle will shock you.
Gold Soared During Last Rate Hike Cycle
From Peter Boockvar: Ahead of the 3rd Fed rate hike, the US dollar for all the world’s love for it is barely higher than it was two years ago. On March 13th 2015 the euro heavy dollar index closed at 100.33 and today stands at 101.34. On that day in March 2015 the euro closed at $1.0496 and is near $1.07 today. This is with all the divergence in monetary policy between the Fed and the ECB…
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I repeat my positive and contrarian stance on the euro as I don’t subscribe to the political worries this year ahead of the key elections, the ECB is pulling back too from its extraordinary measures (will negative rates end before QE does?) and the euro region still has a trade surplus. Also of note, gold on March 13th 2015 closed at $1152 vs $1207 today as of this writing. I seem to hear every day that higher nominal US interest rates is negative for gold but I need to remind people of what happened the last time the Fed embarked on a rate hike cycle. That started in June 2004 off the 1% fed funds level. Gold then stood a few bucks below $400. Just before the Fed got to 5.25% in the fed funds rate, gold traded above $700. See chart:
Gold Soared $325 During 2004-2006 Rate Hikes
Bottom line, look at real rates, not nominal when trying to call the direction of the US dollar and gold. The nominal 5 yr yield is at 2.09% vs 1.59% two years ago. But, the real 5 yr yield today is at -.03%, essentially unchanged with -.003% on this same date in 2015.
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