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Gold Investors: It's Time You Knew the Truth About the Fed

Do hawkish Fed policies hurt gold prices and dovish ones help them? Find out right here.

by Nico Isaac
Updated: June 14, 2017

Allow us to interrupt gold investors' regularly scheduled tailgate of the June 13-14 Federal Open Market Committee meeting for this very urgent message:

The question facing you today was never IF the Fed was going to raise rates this time around. The number-crunchers predicted a 93.5% probability of a hike.

The big unknown was "how much" of a hike and how determined Fed chairwoman Janet Yellen's would be regarding future policy. Say the mainstream pundits: a hawkish Fed is bearish for gold. To wit: 

"Gold notches fifth straight day of losses as Wall Street prices in near certainty of a lift to US benchmark rates. Fed and other central bank jaw boning and hawkish sound frequently lead to gold weakness." (June 13 MarketWatch) 

While a dovish Fed is bullish for gold -- 

"Gold turns higher as soft economic reports raise doubts on outlook for Fed policy. The reports aren't seen delaying a likely Fed hike Wednesday, although could frame the conversation on the aggressiveness of Fed policy moving forward." (June 14 MarketWatch)

There's just one problem with this argument; namely, it isn't exactly accurate. Alas, we stand before you with the following 15-year price chart of gold, alongside every major Fed monetary policy initiative over the same period.

Look closely, and the truth becomes clear: Hawkish policy isn't bearish for gold; while dovish policy isn't necessarily bullish, either. Under the chart is a more elaborate explanation of each policy measure:

  • (Hawkish) 2003-2007: Fed raises interest rates an unprecedented 17 times! -- from a half-century low of 1% to 5.25%. Gold prices should fall ... they soar instead.
  • (Dovish) 2007-2008: The Fed's rate pendulum swings the other way, with TEN rate cuts to a record low of 0 %. Gold prices continue to soar.
  • (Dovish) December 2008 to March 2010: The Fed launches the first round of Quantitative Easing. Gold prices soar.
  • (Dovish) November 2010 to June 2011: The Fed launches QE 2. Gold prices soar.
  • (Dovish) September 2011 to June 2012: The Fed pulls the trigger on "Operation Twist." The central bank swaps $400 billion of short-term bonds for the same dollar amount in longer-dated securities. Gold prices plummet.
  • (Dovish) September 2012-October 2014: The Fed launches QE 3, culminating in the largest inflationary campaign in history via three rounds -- $4.5 trillion -- of quantitative easing. Gold prices plummet in their worst losing streak in three decades.
  • (Dovish) 2008-December 2015: The Fed maintains an unflinching 0% interest rate policy. During this time, gold prices both soar to a record high in 2011 -- and crash nearly 50% to a six-year low in December 2015.
  • (Hawkish) December 16, 2015: The Fed raises rates for the first time in 11 years. Gold prices begin to rally.
  • (Hawkish) December 14, 2016: The Fed raises rates. Gold prices rally.
  • (Hawkish) March 15, 2017: The Fed raises rates. Gold prices continue to soar to their highest level in 4 years.

The evidence is undeniable. Gold prices are not led by the Fed. There's a much larger force at play, driving the precious metal's trend. We believe it is investor psychology, which unfolds as Elliott wave patterns on gold's price chart.

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