How could a rate hike affect precious metals?

December 14, 2015 01:06 PM

The markets have for the most part already priced in a Federal Reserve rate hike which is expected next week.

Yesterday Fed Funds futures indicated an 80% chance of a rate hike. It would be the first hike in roughly nine years. The Fed last began a new hiking cycle in 2004. We consult history to decipher the potential impact (of a rate hike) on the embattled precious metals sector.

The chart below plots the USD index, the Fed Funds rate and gold. We marked the points at which the Fed Funds rate began to increase. The red marks show the two points which are most comparable to today with respect to the USD index. At those points (1983-1984 and 1999) an increase in the Fed Funds rate was preceded by a strong uptrend in the USD index

Dec112015USDFedGold.png

The Fed Funds rate increases in 1983-1984 were preceded by USD strength but also massive rebounds in gold and gold stocks. From mid-1982 into early 1983, gold rebounded by 73% and the Barron’s Gold Mining Index rebounded by 210%.

The Fed Funds rate increase in 1999 is most applicable to today because it was preceded by USD strength and steep declines in gold, gold stocks and commodities. (It was also preceded by strength in U.S. equities and major weakness in emerging markets).

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