How To Trade Gold When The Fed Makes A Rate Decision

The December Federal Reserve meeting kicked off Tuesday, and a large majority of economists are expecting an interest rate hike from the Fed. Traders looking to position their portfolios ahead of the news might be wondering what to expect from gold if the Federal Reserve announces a modest rate hike.

Gold And Rate Hikes

The conventional belief among traders is that higher interest rates are bad news for gold. The argument is that gold doesn’t generate fixed returns the way bonds do, so investors prefer bonds to gold when interest rates are rising.

In fact, market fears over rising interest rates were one of the primary drivers of a selloff in gold and gold stocks in early November.

However, a closer look at the historical numbers suggests that gold, on average, performs just fine during extended periods of Fed tightening.

Looking Back

In the six Federal Reserve tightening cycles of the past 30 years, gold averaged an 11.2 percent gain per cycle. In fact, gold prices rose during four of the six previous tightening cycles.

In the most recent cycle from June 2004 for August 2006, gold prices soared 56.9 percent.

What To Expect

Gold traders can expect some volatility following an announcement from the Fed, which might include a knee-jerk selloff. However, investors bullish on gold over the long term shouldn’t let an interest rate hike keep them from buying the SPDR Gold Trust (ETF) GLD on the dip.

Traders looking to speculate on short-term volatility can look to triple-levered gold ETNs Credit Suisse AG – VelocityShares 3x Long Gold ETN UGLD and Credit Suisse AG – VelocityShares 3x Inverse Gold ETN DGLD for some major short-term trading action.

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