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Precious Metals

Gold via Fed Fund Interest Rate
- A Historical Prospect

March 08, 2015

We are very bullish on gold long term prospect. Many fear that as Fed enters its long term interest rate hike cycle, gold price will go down further. The following chart will tell you the true story - gold price and interest rate has positive correlation not negative one most of the times and the only time they are in negative correlation is when gold price moves higher while interest rate keeps moving down.

The gold price has been set by US government for a long period of time until recently. The official U.S. Government gold price has changed only four times from 1792 to the present. Starting at $19.75 per troy ounce, raised to $20.67 in 1834, and $35 in 1934. In 1972, the price was raised to $38 and then to $42.22 in 1973. A two-tiered pricing system was created in 1968, and the market price for gold has been free to fluctuate since then.

Let us take a closer look of the above chart:

Gold price started its real move, either up or down, from 1971.

      • 1971 - 1974: Gold price moved up from $40.62 to $154.00. Fed Fund interest rate up from 4.67% to 10.51%.

      • 1976 - 1981: Gold price ran up from $124.74 to $615.00 while Fed Fund interest rate skyrocketed from 5.05% to 13.35%.

      • 1981 - 1999: This is the big down cycle for both gold price and interest rate. Gold price dropped from $460 to $278 and Fed Fund interest rate pulled back from 16.39% to 4.97%

      • 2001 - 2003: This is the period that gold price moved up while interest rate pulled back further. Gold price went from $$271.04 to $363.38 while interest rate dropped from 3.88% to 1.13%.

      • 2004 - 2007: The third time that both gold price and interest rate move up together. Gold price ran up from $409.72 to $695.39 while interest rate increased from 1.35% to 5.02%.

      • 2008-2012: This is the second time that gold price and interest rate moved in opporsite direction. While gold price made a big move from $871.96 to $$1662.50, interest rate dropped from 1.92% to 0.14%.

      • 2013 - present: This is the forth time both gold price and interest rate dropped. While gold price pulled back from $1662.50 to $1239.00, interest rate dropped from historical low of 0.14% to almost zero.

      The table below shows the correlations between Gold price and Fed Fund interest rate over the years

That is, gold price and interest rate are in positive correlation most of the time. When they are in opporsite direction, it is gold up and interest rate down.

Data from over 60 years of history has never shown an increased interest rate will result in lower gold price.

Of course past performance can never be used to predict future performance.

But it is our view that 3 1/2 year's gold price down cycle is about to end and we will see the start of long up moves once the Fed starts its interest rate hikes.

 

 

   
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