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Gold/Silver: The real story behind rising interest rates

Commentaries & Views

It was another volatile week in precious metals, with the price of Gold fluctuating $100/oz and Silver $1.74/oz. At the same time, the markets appear to have shifted from chasing geopolitical headlines to taking more of a focus on the economy and rising interest rates. One of the most asked questions I fielded on Wednesday was how will a hawkish Fed and the rate hike cycle impact the price of Gold? So, we at Blue Line Futures sat down and analyzed this relationship. We chose August 1971 as our starting point when President Nixon abolished the Gold standard, marking Gold at $35/oz. Below is a summary of our findings.


The rate hike cycle arguable began in March 1972 when the Fed hiked by 25 basis points to 5.5%. Then two months later, in May, Gold rallied by 19.774% to $59.75. The Fed does an additional hike of 25 basis points in December.


The Fed truly embarks on a rate hike cycle, adding another 25 basis points to 6.0% in January 1973. In February, Gold rallies 28.6% to $85.30 as Fed hikes 50 basis points to 6.5%. The Fed hikes to 11.0% to battle inflation between February and August. Gold trades to $126.40, nearly doubling on the year in June. Gold finishes 1973 at $112.30, +72%.


Gold hits a high of $179.8 in April, with the Fed rate hike cycle peaking at 13% in July. The Fed later cuts rates to 8.0% in December, while Gold finishes the year at $186.7.


Inflation worsens, and Fed embarks on a massive tightening cycle, taking rates from 6.0% in 1977 to 20% in 1980. Gold rallies to a high of $875.


Fed begins the hiking cycle, taking rates to 6.5% in March 1988 and 8.38% in December. Gold rallies from $403 to $502 during that timeline.


The Fed lifted off from 1% in June 2004 to 5.25% in June 2006. Gold went from $319 low in 2003 to a high of $645 in May 2006.


The last hiking cycle began in December 2016. Gold bottomed the day after lift-off at $1046.


There was another lesson we uncovered which was the tone of the Fed and the state of the economy. Our analysis determined that if the Fed raises rates into a "declining growth" environment, this was "bullish" Gold. Conversely, if the Fed raises rates into an "accelerating growth" environment, this was "bearish" Gold. To further help you understand the macro environment, we created a free "Gold Trends Macro Book". This monthly updated booklet will provide you with all the quantitative analyses of the precious metal markets. You can request yours here: Free Gold Trends Macro Book.

Daily Gold Chart

Our Strategy

After two volatile weeks, the "weak hands" that chased Gold and Silver at the top have stopped out of their positions with sizable losses. The problem most individuals have trading geopolitical headlines is they fail to volatility adjust their position sizing, resulting in a top-heavy position. When the euphoria comes out of the market, we frequently see large selloffs that allow us to buy Gold and Silver at a discount. Therefore, we will continue to use the 10 oz micro Gold futures to scale into the market on corrections against the significant higher low forming on the charts. We will also approach Silver with the 1000 oz contract and look at long-dated call spreads that have favorable risk to reward setups. To learn more, we completed a new educational guide that answers all your questions on how to transfer your current investing skills into trading "real assets," such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.