Gold Defies Rate Hike Expectations in History-Backed Trend

The recent US Fed rate hike has sparked concern among investors about its impact on gold prices. However, history suggests that gold may actually outperform in the months following the first rate hike of a tightening cycle.

A World Gold Council analysis of four decades of data shows that gold tends to weaken before a rate hike but then recover and outperform afterwards.

The current rate hike cycle, if it is one, began on September 16 when the Fed raised the fed funds rate by 25 basis points to 3.75%-4%. The 'dot plot' projected more hikes in the months ahead, causing a dip in gold prices initially. However, the next day, the price recovered and traded close to $4,400 per ounce.

Gold's performance during past rate hike cycles has been mixed. In the 1994 cycle, gold underperformed, but in the 2004 cycle, it rose by roughly 49% over the same span. The 'rate hike leads to a fall in gold' rule was broken in 2022 when gold gained 13% in 2023 and around 25% in 2024 despite rising real yields.