What is the impact of the Fed's interest rate hike on gold?
The Fed's interest rate hike will boost the dollar exchange rate. As an investment product denominated in US dollars, if the US dollar appreciates, the price of gold will be directly under pressure. On the other hand, raising interest rates means that the US economy is running well and the US dollar is expected to rise, which will attract more funds to flow to the US dollar. As an investment product that belongs to the same safe-haven assets as the US dollar, the funds in the gold market are bound to decrease, and the price of gold is also under pressure. From a deeper perspective, the Fed's interest rate hike means that the United States, the world's largest economy, is operating well, which is conducive to stabilizing the risks in the financial market. If investors' risk aversion cools down, gold as a safe-haven asset will also be suppressed.
In the short term, raising interest rates is harmful to gold, that is to say, the expected increase in interest rate policy or its direct implementation will lead to downward pressure on gold prices. However, from a longer time span, after the implementation of the interest rate hike policy, gold prices may not be under pressure.
Does gold always fall when the Fed raises interest rates?
In the historical cycle of the Fed's interest rate hike, we marked the cycle of the Fed's nine interest rate hikes since 1970, and the performance corresponding to the gold trend. In the nine interest rate hike cycles, gold rose three times, fell three times and fluctuated sideways three times. This shows that the price of gold will not necessarily fall during the Fed's interest rate hike cycle.
We subtract the US inflation rate from the US federal funds rate to get the US real interest rate. Comparing the real interest rate in the United States with the trend of gold, we can see that when the real interest rate is high, gold will be suppressed, and at this time, the Fed's interest rate hike will make gold fall. Conversely, when the real interest rate is negative, gold will be supported. At this time, if the Fed raises interest rates slightly and the improvement of negative interest rates is not obvious, gold will still be supported. When the real interest rate is around 0, the impact on gold is weak, and gold is easy to form a volatile trend at this time.
From this perspective, the current real interest rate in the United States is in a negative region. If the Fed raises interest rates slightly and cannot change negative interest rates, it is more likely that gold will continue to be supported. The detail that needs attention is whether gold can recover its decline when it falls because of the Fed's interest rate hike. If gold can recover its decline, it means that gold has strong resilience to the Fed's interest rate hike. Once the Fed stops raising interest rates later, gold will get rid of the shackles and tend to rise.