Gold has historically delivered positive average returns over three and six months following the US Federal Reserve’s first interest rate hike in a monetary tightening cycle, according to an analysis by Motilal Oswal Financial Services.
The analysis shows that gold generated an average return of 4.22% in the three months after the first rate hike, rising to 5.84% over six months.
The win rate was 60% across both periods, based on five observations.
The historical trend comes at a time when gold prices are facing pressure from expectations of further monetary tightening in the US.
On Thursday, November 12, spot gold fell below $4,000 per ounce, touching a more than one-week low after stronger-than-expected US inflation data and hawkish comments from Federal Reserve officials strengthened expectations of another rate hike next month.
How has gold performed around Fed rate hikes?
Motilal Oswal’s analysis, based on historical tightening cycles, shows that gold recorded an average decline of 0.50% in the month immediately following the Fed’s first rate hike. However, its average returns turned positive over the subsequent three- and six-month periods.
Gold also remained under pressure in the run-up to the first rate hike. It declined by an average 2.50% in the preceding six months, 1.09% in the preceding three months and 0.21% in the month immediately before the policy move.
The win rate was 33% over six months before the first hike, 50% over three months and 33% over one month. Following the hike, it stood at 40% in the first month and 60% over both three and six months.
The analysis covers six observations for the periods preceding the first hike and five for the periods following it.
Why are gold prices under pressure?
Spot gold fell 0.2% to $3,981.49 per ounce by 0310 GMT on Thursday (November 12), after touching its lowest level since November 4 earlier in the session. US gold futures for December delivery declined 0.3% to $3,987.50 per ounce, according to Reuters.
US consumer inflation accelerated more than expected in October, while hawkish signals from Fed policymakers strengthened expectations of a more aggressive rate increase in December. The dollar climbed to a 19-month high against major currencies, making dollar-denominated bullion more expensive for holders of other currencies.
Higher interest rates generally weigh on gold because the metal does not generate interest income. Rising yields increase the opportunity cost of holding bullion, potentially reducing its appeal relative to interest-bearing assets.
Market participants are now awaiting the US Producer Price Index (PPI) data due on Friday for further indications of inflationary pressures.
What is Motilal Oswal’s outlook on gold?
Despite near-term volatility, Motilal Oswal Financial Services maintains a positive medium-term outlook on precious metals, citing geopolitical risks, fiscal concerns and sustained central-bank demand.
In its November 5 Precious Metals Quarterly report, titled ‘Gold’s Rally: Deferred, Not Derailed’, the brokerage recommended a buy-on-dips approach to gold. It identified an accumulation range of $3,800-$3,900 per ounce, with a short-term target of $4,200 an ounce and a medium-term target of $4,500-$4,700 per ounce.
For the domestic market, assuming a USD/INR exchange rate of 96, it identified ₹1.35 lakh per 10 grams as an accumulation zone, with a short-term target of ₹1.48 lakh per 10 grams and a medium-term target of ₹1.60 lakh per 10 grams-₹1.68 lakh per 10 grams.
The brokerage said the direction of US real yields would remain an important determinant of gold prices, while geopolitical uncertainty, fiscal concerns and central-bank diversification could provide support over the medium to long term.
Historical returns, however, do not guarantee similar performance in future rate cycles. Gold prices will continue to be influenced by monetary policy, currency movements, bond yields and global economic developments.
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Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers should consult certified experts before making any investment decisions.