Gold Defies Fed Hysteria with Surprising Strength
Gold Fed hysteria has long plagued gold traders, causing kneejerk selloffs when federal-funds-rate trajectories steepen. However, history suggests that these bearish reactions are irrational, as gold tends to thrive in Fed-rate-hike cycles.
The theory behind dumping gold on higher rates is based on the idea that gold's competitiveness with other assets weakens as interest rates rise, causing traders to shift capital out of gold and into more lucrative investments.
Speculators' super-leveraged gold-futures trading exacerbates this selling, resulting in weaker gold prices. The average margin for a US 100-ounce gold futures contract is $21,732, which allows speculators to maintain extreme maximum leverage of 19.6x.
This week's FOMC decision saw the Fed hike its federal-funds-rate by 25 basis points, but gold's reaction was much more favorable than expected. After a 2.3% drop on Wednesday during the final two hours before close, gold surged as much as 2.7% to $4,380 by midday Thursday.