Fed interest-rate rises won’t hold the gold price back

published 19 January 2018

Some analysts worry that higher US interest rates are bearish for gold. Because gold has no yield, the higher rates climb, the greater the relative appeal of other assets. But the evidence doesn't bear this out, says Russ Mould of investment platform AJ Bell in The Daily Telegraph.

He has examined the last seven cycles of US interest-rate hikes by the Federal Reserve, and notes that the metal has on average gained 86% between the first increase and the last. This time round, the Fed has hiked five times starting in late 2015, since when gold has gained 23%. It climbed by around a tenth last year, and is currently at a five-month high of around $1,340 an ounce.

It seems that the yield problem is often offset by the reason interest rates rise: to forestall or temper rises in inflation. Gold is seen as a store of value, and inflation is likely to rise this year. A weak dollar (see below) is helping too. It tends to bolster demand for gold from investors who hold other currencies, as dollar-denominated assets become cheaper. There is also plenty of scope for a geopolitical scare to give demand for an asset traditionally viewed as a safe haven an extra boost. Hold onto the yellow metal.