There we go again: gold investors are panicking as the price of gold dives lower.
Admittedly, the technical picture does not look very constructive. However, we have to put this into perspective. Gold in dollar terms may be under pressure, but gold in euro terms does not look that bad, on the contrary in fact.
Gold in euro is setting a chart pattern of higher lows and higher highs in the last couple of months. Even its 50 day moving average seems to be trending positively.
This picture is similar for most currencies, except the dollar.
However, the focus of the market is on gold in dollar, as the market is concerned about an interest rate hike, based on the ‘narrative’ that a rate hike is bad for gold.
But is this narrative correct? It wouldn’t be the first time that the herd is proven wrong.
Contrary to the ‘pundits’ and ‘writers’ who make statements that the crowd wants to hear, we underpin our investigation based on historic facts and figures. In particular, we analyzed gold’s reaction after interest rate hikes in the last decades (as of 1972, when gold started to trade freely).
You will be surpised about our findings!
The first increase of the Fed Funds Rate (the official term for interest rates, used by the Federal Reserve) took place between February 1972 and July 1974.
As you can see on the above chart, gold rose from approx. 40 USD/ounce to 180 USD/ounce(x 4!), as the interest rate increased from 3 to 13%.
The next period of interest rate hike(s) was between June 1977 and March 1980, which was a time characterized by an exceptionally high inflation rate.
Once again, the price of gold went sharply higher, from approx. 100 USD/ounce to 800 USD/ounce: an 8-fold increase!
That period was very volatile, as the Fed brought interest rates sharply down after peaking. Because of that, and the fact that inflation remained stubbornly high, the Fed had to increase rates between July 1980 and January 1981.
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