The rise and fall of gold prices are related to many factors, the most familiar one must be interest rate hikes, and this factor is the focus of many investors. Here, I will analyze it in detail.
An interest rate increase means that banks raise interest rates on deposits and loans. If the rate increase is explained more officially, it means that the central bank of a country or region is actually raising interest rates, which will increase the borrowing costs of commercial banks from the central bank, thereby forcing Market interest also increases.
The purpose of raising interest rates includes reducing money supply, suppressing consumption, suppressing inflation, encouraging deposits, slowing down market speculation, and so on.
The Fed’s interest rate hike, as the name implies, means that the U.S. central bank raises deposit rates, which can encourage funds to return to U.S. banks. Another point of raising interest rates is also a phenomenon that proves that the U.S. economy, employment, and inflation have improved. It used to be that the U.S. government gave $100 a year Interest, now the same money can be paid up to 200 US dollars, and this increase is an increase in interest rates. In fact, many people are familiar with the probability of interest rate increases, so I won’t explain too much here.
Since 1982, the Federal Reserve has experienced 5 rounds of significant interest rate hikes, as shown in the table below.
As shown in the above table, the time difference between the Fed's 5 interest rate hikes is about 4 years. Although the purpose of raising interest rates is to control inflation, the reasons for raising interest rates each time due to inflation are different.
The first rate hike was due to inflation in the U.S. reaching 13.5% in 1981, close to hyperinflation. The Federal Reserve suppresses inflation through large-scale interest rate hikes.
The second interest rate hike was due to the US stock market crash in 1987, and the Federal Reserve cut interest rates urgently to save the market. Due to the timely rescue of the market and the low impact of the stock market on the economy, inflation has continued to rise since 1988, and the Federal Reserve began to raise interest rates in response.
The third interest rate hike was due to the 1990-1991 recession in the United States, and the resurgence of the economic recovery in 1994. In order to control inflation, the Fed raised interest rates in response, and the yield of U.S. Treasury bonds fell sharply. This rate hike is also considered to be one of the factors that led to the outbreak of the Asian financial crisis in 1997.
The fourth rate hike was due to strong growth in the US in 1999 and unemployment falling to 4%. The Internet boom led to inflation, and the Federal Reserve raised interest rates in response. After the Internet bubble burst completely in 2000, the global economy fell into recession again.
The fifth interest rate increase was due to the emergence of the housing market bubble in the United States at that time. The previous sharp interest rate cuts stimulated the bubble in the United States. In 2004, inflation rose, and the Fed began to tighten policies. Continuous interest rate hikes directly led to the bursting of the US real estate bubble, until the subprime mortgage crisis triggered a global crisis. financial crisis.
The above is a brief summary of the past five interest rate hikes by the Federal Reserve, and the next step is the key point, which is also a wave of interest rate hikes that is closer to us. The United States entered a new round of interest rate hike cycle on December 17, 2015. The funds rate was raised by 0.25 percentage points, which is the first rate hike by the Federal Reserve since June 2006, which also means that the United States has entered a new cycle of rate hikes.
At the same time, the Federal Reserve will raise interest rates in a gradual pace. The Fed has two major goals for raising interest rates this time. One is to increase investment and create jobs. The other is to control inflation and better maintain the dominance of the US dollar among global currencies. .
This time, since the end of 2015, Federal Reserve Chairman Yellen started a new round of interest rate hikes, which also means that the U.S. economy has begun to recover and strengthen. The pace of interest rate hikes is not affected by factors such as employment, inflation, and unemployment. Soon, but still in the midst of continuous and rhythmic rate hikes.
First of all, "sell expectations and buy facts" is not too difficult to understand literally. The so-called selling expectations is to sell according to the news. Why is it selling expectations when interest rates are raised, as shown in the figure below.
That is to say, raising interest rates is bad for gold and bullish for the dollar. When the rate hike is considered to be implemented, everyone will start to sell their gold.
The news here refers to anticipatory panic and rumors. Gold is sold on the premise of market rumors and negative expectations, so the price of gold will fall on the eve of raising interest rates.
Then, when the price of gold continues to fall for a period of time, after the interest rate hike is implemented or the expectations are digested, the market will not go after the short at a low level, because the news that everyone knows is already worthless.
At the same time, the interest rate hike itself is a policy implemented when economic conditions permit. In fact, people are more concerned about whether the U.S. economic growth can keep up with the rate hike after the rate hike is implemented. Will the interest rate be a superficial phenomenon and fail to truly reflect the level of economic recovery, which will lead investors to buy gold again to avoid the risks brought about by the instability and uncertainty after the interest rate hike.
In general, the expectation of interest rate hikes is negative for gold, leading to a drop in gold prices. There is something like this: selling expectations, buying facts or selling facts, buying expectations.
In recent years, before each rate hike by the Federal Reserve, gold has fallen at different times, and this decline is due to the anticipation just mentioned. Therefore, before raising interest rates, the investment is more focused on selling gold Mainly, that is, shorting gold.
However, when the interest rate hike is implemented, investors need to change their investment direction, because the price of gold will generally rise after the interest rate increase is implemented.
Why is the price of gold going up? Because if interest rates are raised, there will be a situation of buying facts, causing gold to rise; if interest rates are not raised, gold will also rise.
For example, in March 2017, after the interest rate hike, the price of gold soared in the early hours of the morning, and continued the upward trend in the next few trading days without a callback, which basically did not give the longs a chance. When the question of whether the price of gold will fall after interest rates, the price of gold has already risen by tens of dollars.
In December 2015, when the Federal Reserve raised interest rates for the first time, the price of gold fell downwards, and then rose, with an increase of nearly 300 US dollars per ounce. Some investors are crazy, and long investors dare not operate.
In any case, after raising interest rates, gold tends to rise in a general direction, and investors should also follow the direction of such expected news, because the purpose of raising interest rates is not to pressurize gold, but only to maintain the stability of the US dollar. Gold is only a US dollar. denominated currency or commodity only.
To sum up, the specific operation should be to sell gold before raising interest rates, buy gold on the day of raising interest rates, follow the general direction or grasp the benefits brought by the market.
Risk reminder: remember to take profit and stop loss when trading, and put risk management first.
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