In a recent tweet by Incrementum AG, we were presented with a fascinating correlation between the Federal Funds Rate and the price of gold.
The Federal Funds Rate, often referred to as the “fed funds rate,” is the interest rate at which depository institutions lend funds maintained at the Federal Reserve to other depository institutions overnight. It serves as a key tool for the Federal Reserve to control the money supply and influence economic growth. Understanding its impact on the gold market can be valuable for investors and individuals interested in the precious metal.
The chart enclosed below represents the relationship between the Federal Funds Rate and the price of gold over the past few decades. The black line represents the interest rates, while the golden line illustrates the price of gold.
We can see a notable correlation between the two variables. Specifically, it reveals that gold price rallies tend to occur once the interest rate hikes stop. This phenomenon can be observed throughout history, offering valuable insights for investors.
For instance, examining the year 2000 to 2001, when the Fed Funds Rate reached 6%, we notice a significant rally in the price of gold. Throughout three years, as interest rates decreased to less than 1%, gold witnessed a remarkable increase of 43% in dollar terms (potentially more in INR terms).
A similar pattern emerges in the 2008 period. As interest rates plateaued near five and a half percent, and subsequently collapsed, gold experienced a substantial uptrend. During this period, from the top to the bottom of the interest rate cycle, gold prices surged by almost 76%.
Understanding this correlation helps us make predictions about future gold prices. Currently, with the Fed Funds Rate at 5.5% and expected to come down over the next few years, it is likely that gold prices will follow historical trends and continue to rise.
The analysis on the tweet suggests that we can expect an increase of 30% to 50% in dollar terms, and potentially 60% to 80% in rupee terms over the next four to five years.
These projections offer excellent opportunities for investors in the Indian gold market. As long as interest rates do not rise further, individuals purchasing gold in India can expect to have a fantastic time over the coming years.
It is important to note that this analysis is based on historical data and historical correlations. While there is a strong relationship between the Federal Funds Rate and gold prices, future market conditions can always deviate from patterns observed in the past. Therefore, investors should consider other factors and conduct comprehensive research before making investment decisions.
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