Tuesday, June 3, 2014

Gold Prices

Market consensus is for Federal Reserve to start hiking rates from the middle of next year. A review of gold's price performance during the past five episodes of Fed tightening reveals mixed results. Rising rates between 1988 and 1989 coincided with considerable declines in gold prices; the mid- and late-1990s showed relatively benign performance; while gold rallied strongly during the periods between 1986 and 1987 and the early 2000s.

One key feature of the previous tightening cycles was high US inflation. In particular, consumer inflation increased sharply in the late 1970s and early 1980s to as high as 14.8%. This compares with average inflation below 2% over the last five years. Tame inflation in spite of unprecedented easing by the Fed has tempered market expectations for future inflation - right now investors are not too concerned about the threat of rising pricing pressures. Nevertheless, UBS economists have been flagging the upside risks.