FX.co ★ How US Fed funds rate to affect gold?

Nowadays, it is commonly held that a price of the precious metal tends to fall when the US Fed key interest rate goes up. However, it is far from it. Such developments on the commodity market can actually take place if the US Federal Reserve resumes its regular monetary policy.

Let’s recall how gold’s value and US Fed rates were related. In the 70-s last century, a rise in the federal funds rate pushed gold prices up notably. Over 10 years, the precious metal benefited from the key interest rate hikes and gained in value. However, since 1975 when the funds rate was lowered, the gold market responded with correction. At the moment, it is hardly possible to predict a gold dynamic for sure as it is unclear how the US regulator will act in the coming year.

XXI century imposed its principles of how the US Fed interest rate influenced prices of the precious metal. In 2001-2004, the funds rate was cut gradually while the gold was rising in value. In 2004-2007, markets witnessed a rise both in the key interest rate and gold. In 2007-2011, gold was growing in value accompanies by the lower funds interest rate. Since 2011, after the US Fed slashed the key interest rate to zero, gold also dipped. Currently, the US Fed monetary policy is baffling analysts, so they find it difficult to foresee spikes and falls of the gold market.

Apart from the US Fed key interest rate, there are other factors affecting a dynamic of the precious metal. Analysts point out the following factors: a yield curve, influence of loan spreads, strengthening or weakening of the US dollar, trust in the monetary regulator and government, and a pace of a money supply change etc.

One thing is obvious. Gold prevents the global bubble from swelling, in particular a debt bubble. In case a new financial crisis breaks out, gold will definitely grow in value. This viewpoint is shared by most experts.