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Gold Actually Thrives During Fed Rate-Hike Cycles Historically

  • Federal Reserve rate-hike cycles are not bearish for gold as is widely believed today. Gold has actually risen in more rate-hike cycles than it has fallen.
  • The more extreme the rate-hike cycles the greater gold’s gains. Gold surged dramatically in the last rate-hike cycle in the mid-2000s, and rocketed higher during the 1970s' extreme rate-hike cycles.
  • Investors diversify capital into gold when conventional stock and bond markets are weak. And Fed rate-hike cycles hurt stocks and bonds on multiple fronts, greatly ramping investment demand for gold.

The epicenter of gold's intractable weakness over the past couple years has been the Federal Reserve's upcoming rate-hike cycle. Everyone assumes higher interest rates will devastate zero-yielding gold, leaving it far less attractive. This premise led investors to avoid gold like the plague, and speculators to short sell it at wild record extremes. But provocatively, history proves gold thrives in Fed rate-hike cycles.

It's easy to understand how the Fed's first rate-hike cycle in over 9 years has cast a pall over traders' gold outlook. While gold's unique attributes make it exceptionally valuable for portfolio diversification, it generates no cash flows. Gold will never pay dividends or interest, which makes it a sterile investment. Presumably demand for yield-less assets will wane as rate hikes naturally force yields on bonds higher.

While this bearish gold thesis sounds perfectly logical, its core assumption is fatally flawed. While gold has never offered a yield, investors all over the world have still flocked to it all throughout history. They certainly weren't looking for a yield play, and bought gold to take advantage of its formidable strengths on other fronts. If yield had ever been this metal's dominant attribute, gold would indeed be essentially worthless.