Sell Rumour / Buy Fact – Gold and Tightening


In the context of a gold price struggling in the face of the ‘imminent’ US rate rise, foreign currency strategist David Bloom recently had this to say:

“History shows that gold prices also fall leading into a rate hike and generally rise, though sometimes with a lag, after the first rate hike. Investors are apt to unload gold in anticipation of tightening monetary policies. This negative pressure is sustained until the Fed announces a rate hike which then eases the negative sentiment towards the yellow-metal. This explains the subsequent rallies in gold that occurred shortly after the Fed announced the first rate hike in the last four tightening cycles.” [1986. 1994, 1999 and 2004]

It’s a classic case (yet again) of sell the rumour, buy the fact.  The continual ‘nearly there’ rhetoric from the US Fed about raising rates just continues to put pressure on this gold price (until the Chinese helped this week with their shock currency devaluation).  Whilst this is a wonderful buying opportunity for many, it’s growing old for fully invested gold holders.

For us, whilst the evidence of the last 4 tightening cycles is clear and comforting, it only tells part of the story this time around.  None of those previous cycles had a market strung out on stimulus and debt to the extent this one does – and we are talking GLOBALLY.  We are quite simply in unprecedented times.  If the Fed raise rates in September or December by a paltry 0.25% just to ‘rip the bandaid off’ despite the economic data not supporting it per se, the effects on markets could be far worse than they are pretending.

With this in mind a September rate rise certainly fits with the many calls of a September/October financial crash if it is indeed the catalyst.  And therein lies the Fed’s dilemma…