Last week, the Federal Reserve boosted interest rates, but that did not stand in the way of the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products posting weekly gains. Now, Goldman Sachs is bullish on the yellow metal, saying gold has the potential to “outperform”in the months ahead.
“For the first time in more than five years, commodity analysts at the U.S. investment bank are bullish on yellow metal prices. Goldman’s analysts said signs of an uptick in inflation and the ‘increased risk’ of a stock market correction should both prove to be price supportive for bullion,” reports CNBC.
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While higher interest rates can serve to chase investors from gold because the yellow metal does not feature coupon payments or dividends, this time around could be different, particularly because the dollar has not been responsive to Fed tightening. Although the Fed is widely expected to raise rates multiple times this year, the dollar remains disappointing relative to other major currencies. Commodities, including gold, are denominated in dollars, meaning they usually have an inverse relationship to the U.S. currency.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) is down about 2.5% year-to-date. That after the fund fell more than 9% last year. UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. UUP tracks the Deutsche Bank Long USD Currency Portfolio Index – Excess Return Index.
Not That Bad When Interest Rates Rise
While conventional wisdom often dictates gold is vulnerable when interest rates rise, historical data suggest otherwise.
“Our commodities team believes that the dislocation between the gold prices and U.S. rates is here to say,” according to Goldman Sachs. “Based on empirical data for the past six tightening cycles, gold has outperformed post rate hikes four times.”
Over the past 20 years, gold has outperformed alternative and traditional assets, such as developed market stocks, hedge funds, developed markets debt, global real estate investments and the broader commodities complex, according to WGC data.
“The market is currently pricing in three rate hikes for 2018 — and that remained the baseline forecast from the U.S. central bank, but at least one more increase was added in the following two years,” reports CNBC.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.