Gold vs. Fed Funds Rate: Analyzing the Relationship

In this analysis, we will explore the historical performance of gold in relation to the Fed Funds Rate over the past couple of decades.

This chart from Bloomberg showcases the changes in the Fed Funds Rate from the year 2000 to 2023. During this period, the Fed Funds Rate experienced significant fluctuations, starting at 6.5% in 2000, dropping to nearly 1% in 2003, rising again to 5.25% by 2006, crashing down to 0.25%, climbing to 2.3% in 2021, and ultimately settling at 4.5% as of now.

The main focus of this analysis is to examine how gold performs in dollar terms when the Fed Funds Rate starts to fall.

Gold Performance During Rate Reduction Periods

Looking back at past cycles, we find that whenever interest rates fell, gold experienced substantial gains. Let’s delve into these cycles to gain a better understanding:

1. Cycle 1: 2000-2003 – During this period, as interest rates fell from 6.5% to nearly 1%, gold witnessed a remarkable surge of 170% in value.

2. Cycle 2: 2006-2009 – As interest rates decreased from 5.25% to 0.25%, gold’s value rose by an impressive 272%.

3. Cycle 3: Post-COVID – Amid the COVID-19 pandemic, interest rates dipped from 2.2% to near 0.25%, gold experienced a substantial increase during this period as well.

These historical cycles highlight the correlation between falling interest rates and the upward movement of gold prices in dollar terms. It is important to address this for your knowledge as there is speculation about interest rates topping out and the possibility of a downward cutting cycle. Based on the past cycles, whenever interest rates have declined, gold has demonstrated the potential for substantial gains ranging from 50% to 200% in dollar terms. This historical pattern suggests that if interest rates deviate from their current trajectory, the price of gold will react accordingly.

However, if interest rates continue to remain stable or rise further, the outlook for gold may be less favourable. In such a scenario, gold may either undergo a correction or trade sideways, with potentially lesser price movements.

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