26 Jan

How Gold Could React to a Fed Rate Hike

WRITTEN BY Annie Gilroy

The Fed’s rate hike process

The Fed started its rate hike process back in December 2015, raising key interest rates by 25 basis points. Between then and December 2017, it has raised interest rates five times. The Fed is expecting three rate hikes in 2018. The actual count should, however, depend on data, especially inflation. There are wide-ranging views among Fed members on the number of future hikes.

How Gold Could React to a Fed Rate Hike

Fed hikes and inflation

One factor puzzling the Fed is inflation remaining below its 2.0% target level. Aggressively raising rates when inflation remains stubbornly below the target is difficult. The Fed has been saying for a long time that this is because of “transitory” factors. As we discussed previously in this series, the pick-up in inflation in December 2017 has strengthened hopes of the Fed staying on its monetary tightening path.

Gold and hikes

Due to weak inflation data, the market was previously factoring in rate hikes later in the year. However, after the recent inflation data was released, the odds of a rate hike in March 2018 have increased considerably.

Whereas a rate hike could erode gold’s appeal as an investment option, higher inflation should encourage investors to put some money into gold as an inflation hedge. Lower-than-expected rate hikes could benefit gold stocks (GDX)(NUGT) such as New Gold (NGD), Coeur Mining (CDE), Harmony Gold (HMY), and AngloGold Ashanti (AU). These stocks fell 6.5%, 17.5%, 15.4%, and 3.0%, respectively, in 2017.

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