How Did Gold Perform After Fed Hikes? The Result Will Surprise You

The Federal Reserve is widely expected to raise interest rates Wednesday for the first time since 2023. The textbook says that it is bad news for gold, an asset that pays no income and competes directly with interest rates. That is the theory. History refuses to follow it.

1% in the 12 months following the first rate hike. It finished higher in seven of those 10 periods. 1%. That result challenges one of the most familiar rules in financial markets.

Gold Feels The Pain First The conventional relationship does appear during the opening weeks of a tightening cycle. 7% in the month following the first rate increase. It generated a positive return in only four of 10 cases. But the weakness rarely lasted.

Three months after the first hike, gold’s average return improved to 5%. The metal was higher in seven of the 10 cycles. 6%. Gold finished the period higher 60% of the time.

1% average return makes gold’s historical performance look far calmer than it really was. 8% over the following year. 2%. Then came Paul Volcker, the Fed chairman who pushed rates above 19% to break inflation.

6% over the next 12 months. That was the worst result in the sample and nearly 74 percentage points below the 1972 gain. 3% following the March 1983 cycle. Yet its performance improved during later episodes.

1% after the first hike in January 1987. 3% after the Fed moved in December 2015. 4% higher one year later. Why Higher Rates Do Not Always Sink Gold A rate hike does not happen in isolation.

The Fed normally raises borrowing costs because inflation is too high, economic growth is unusually strong or both. Persistent inflation can support gold even as the central bank tightens policy. The crucial distinction is between nominal and real interest rates. Nominal rates are the yields investors see quoted in the market.

Real rates subtract expected inflation. They measure the actual inflation-adjusted return available from holding bonds instead of gold. If the Fed raises rates faster than inflation expectations decline, real yields can rise and pressure bullion. That dynamic helps explain gold’s historic decline during the Volcker era.

But if inflation remains stubborn, real yields may stay low even while the Fed hikes. Gold can then continue serving as protection against declining purchasing power. Read Also: How Many Rate Hikes Will The Fed Deliver In This Cycle? Economists Answer Where That Leaves Wednesday The inflation backdrop is the part that matters most.

4% from a year earlier. 75%. A quarter-point increase would lift the top of that range to 4%. That still leaves the policy rate close to inflation rather than far above it.

This is the condition the historical record associates with gold’s better outcomes. The metal struggled in 1980 and 1983 because Volcker pushed nominal rates far above the inflation rate and kept them there. Nothing on the table Wednesday resembles that. A single hike and a pause is one scenario.

A sequence of increases through December is a different one, and it moves real yields far more. Gold — tracked by the SPDR Gold Shares (NYSE: GLD ) — is trading at $4,322 an ounce on Tuesday, about 19% below its Jan. 80. Photo: Shutterstock