Gold & The Federal Funds Rate

• Gold & The Federal Funds Rate
  by Pater Tenebrarum, http://www.acting-man.com/  
  Wrong Assumptions
  It is widely assumed that the gold price must decline when the Federal Reserve is hiking interest rates. An example is given by this recent article on Bloomberg, which informs us that SocGen believes “gold will be a casualty of Federal Reserve policy”. Never mind that the assumption that the Fed will now be able to simply embark on a “normal” rate hike cycle is in our opinion utterly absurd. It will only do that if the inflation genie unexpectedly gets out of the bottle, and is guaranteed to remain “behind the curve” if that happens (more on this further below).
  –
  It seems logical enough: gold has no yield, so if competing investment assets such as bonds or savings deposits do offer a yield, gold will presumably be exchanged for those. There is only a slight problem with this idea. The simple assumption “Fed rate hikes equal a falling gold price” is not supported by even a shred of empirical evidence. On the contrary, all that is revealed by the empirical record in this context is that there seems to be absolutely no discernible correlation between gold and FF rate. If anything, gold and the FF rate exhibit a positive correlation rather more frequently than a negative one!
  –
  Let us look at exhibit one – the 1970s: (top of post)
  –
  read more.

end