Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield.
Fed funds futures imply a rate hike of 25 basis points later this week is almost guaranteed, but the same metric also implies increases of no more than 150 basis points for all over 2017.
“Historically, there have been four similar periods to today’s rate environment whereby rising policy interest rates followed either falling or relatively low interest rates for sustained periods (1976, 1987, 1994, and 2004). When examining the impact before and after an initial rate hike at the onset of these tightening periods, performance on average across the metals complex has been mostly positive,” according to the ETF Securities note seen in Barron’s.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.