What happens to Gold when the Fed starts cutting interest rates?
I believe we are going to see rate cuts later year and I think it's going to ignite a huge move in the price of Gold.
The Fed has just achieved one of the most aggressive hiking cycles not seen in decades with more debt than ever before, for now it looks like inflation is headed lower and the economy and employment are slowly but surely showing signs of rolling over. There is many reasons why the Fed is not going to be able to or willing to continue hiking much more than the current level. Looking out to the mid/long term picture, one has to be bullish on Gold based on history.
What I want to look at today is how the Gold price responds when the Fed pauses the hiking cycle and inevitably starts the rate cutting cycle. Below is a chart of the Fed Funds Rate going back to 2000, I want to highlight each period where they have paused and look at Gold’s reaction.
Okay so let’s start with pause and cut cycle in the year 2000, rates were around 6.5% and the economy was showing signs of weakness not see in a number of years, the Fed cut rates in late 2000, the Dotcom bubble burst coincided closely with this first rate cut. It’s possible the general market reacts the same way this time around, contrary to what many think a rate cut is not usually bullish for stocks in the short term.
Okay so most importantly let’s have a look at what the Gold price did during this period.
Gold held it’s value through the Dotcom blow up, and was basically flat until breaking out in late 2001 going from around $250 and working it’s way all the way to $730 in 2006. That’s nearly a 200% move, currently this type of move would take us over $6000 in a few years.
After this period the Fed starting another hiking cycle that went into 2007, they paused during this time frame and started to cut in late 2007/2008 which of course correlated with the GFC crisis. Also worth noting again that the stock market actually melted down after the fed had started to cut rates.
The 2008-2011 run in Gold made alot of people a fortune in the mining stocks, and it was really was an epic run, let’s have a look at the chart.
Gold did get hit during the GFC crisis and went down around 30% bottoming in late 2008, where it then ran from around $700 all the way up to $1800 in mid 2011. This was really the last mania in gold/silver mining stocks, the sector was full of multi baggers, and what I am hoping for during this next cycle.
Most recently we had the 2018 repo crisis, which led to Powell pausing rate hikes and eventually cutting in mid 2019, Gold ran from $1200 in 2018 and peaked out at $2075 in late 2020 during the cycle. This was also a particularly rewarding time to own mining stocks especially in 2020 after the short-lived covid melt down, which in hindsight was an amazing buying opportunity.
So here we are again on the brink of a Fed pause, in my opinion the Fed is likely going to need to cut rates later this year, when they do this year, there is a fairly high chance based off previous data that the general markets get hit pretty strongly. It’s possible gold sells off to, but once the carnage is over, it will start an epic bull market in the metal. The cycle continues to play out over and over again, and history repeats itself.
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