Gold: No Need to Fear A Rate Hike

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Investors in the gold space were happy to finally escape 2021, a year to forget with lower highs and lower lows. The new year hasn’t started off much better, with gold finding itself down 2% in the first week of trading, rejected once again near the $1,830/oz level. In this update, we look at critical levels for the metal and where it might make sense to buy the dip.

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(Source: TC2000.com)

The price of gold has started off the new year headed in the wrong direction, down more than 2% since its December close, after correcting nearly 20% in 2021. This is despite a backdrop of deeply negative real rates (shown below), which typically results in much stronger performance for the metal. However, with fears of an initial rate hike looming, the worry appears to be that this will be negative for the gold price.

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(Source: YCharts.com, Author’s Chart)

While a rate hike would certainly lead to some mean reversion in real rates, they will still remain deep in negative territory following a hike. Besides, while gold has often been volatile around rate hikes, it’s worth noting that the initial rate hike has been closer to a buy signal than a sell signal. This was the case in Q4 2015, which ended up marking the low for miners and the gold price and kicked off a strong bull market in 2016 and ending the violent correction.

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(Source: TC2000.com)

The other point worth pointing out is that similar to the Q4 2015 rate hike, gold had a negative 18-month return heading into the news, suggesting that the anxiety about a rate hike was already baked in. This appears to be the case this time around as well, potentially making this a “sell the rumor, buy the news” event, which is what we’ve seen from gold’s performance over the past year.

If we take a closer look at the technical picture, we can see that gold continues to…

 

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