Is The Price Of Gold Really So Concerned About Fed Rate Hikes?

Thursday, February 23, 2017

Federal Reserve System

If you’ve read the headlines lately, you might get the feeling that the price of gold is waiting to hear all about what the Federal Reserve will do with its next decision. And this is not new. Goldbugs have always paid close attention to what the Federal Reserve does, particularly since the central bank has such enormous power over the strength of the US dollar.

Recently, a report filed by Reuters wrote that investors on Wednesday morning are waiting to see what the Federal Reserve does. This has led to the possible slow movement on gold we’ve seen. But is there really such a direct correlation between what the Fed does and how gold prices react? Let’s explore.

A Quick Look At The Federal Funds Rate

What most people are talking about when they say “rates” is really the Federal Funds Rate, or the target that the Federal Reserve sets for domestic interest rates. Here’s what it looks like over the past ten years, courtesy of TradingEconomics.com:

As you can see, for the majority of the previous administration in the White House, the target rate was at zero (in response to the financial crisis of 08-09). Only recently has the Fed found the confidence to begin ticking it back up.

Now let’s take a look at gold prices over the last ten years and see if we spot a correlation.

Source: MacroTrends.net

The overall trends seems to be that gold has done well with low interest rates. But gold also started going back down in 2013, when interest rates stayed flat at zero. So there is a mild correlation at best.

If we were to zoom in, would we see a tighter correlation? It likely doesn’t matter. If even the long-term trends suggest that there is only a general inversion of interest rates and the price of gold, it’s hard to say that talks of interest rate hikes are definitely behind any dip or gain in the price of gold in the short-term.

Be Wary Of What You Hear

You’ll see similar headlines throughout the financial news world. Rachel Koning Beals of MarketWatch.com put it this way: “Gold prices were little-changed for a second straight day on Wednesday with investors reluctant to take risks ahead of minutes from the Federal Reserve’s most recent policy-setting confab.”

Is that really a summation of the facts or just a quick-hit analysis?

Finding The Truth In Gold News

The current price of gold is about $1,237 as of this writing. Investors are indeed interested in what the Federal Reserve may or may not do. But to imagine that every little ticker change in the markets is due to the Federal Reserve minutes is a little bit different.

If you’re investing in gold, or in any other vehicle for that matter, you should be willing to see that not everything depends on what the market thinks. Correlation does not always mean causation—if there is a correlation to be found at all. Take many factors into account when making investment decisions, not just one single source.

Darren Capriotti

Darren Capriotti has been a market analyst for the past decade and is an expert in precious metals. He prides himself on his ability to analyze the market and offer true value to investors with questions about gold, silver, and other precious metals. Highly educated, incredibly passionate, and more accurate than most, Darren offers a true, unbiased look into what investors can expect in the precious metals market. You can reach Darren at dcapriotti@gold-eagle.com.