Happy Sunday, GoldBuzzers!

On Wednesday the Fed raised interest rates for the first time in more than three years, and the metals spent the rest of the week deciding what to make of it. Thursday's letter covered the decision itself. Today's Deep Dive zooms out to look at what half a century of rate rises has actually meant for gold.

Let’s get into it. ⬇️

Gold closed Friday at $4,380 an ounce, a one-week high and its first weekly gain in a month, while silver did the real running with a push above $66 - up almost 3 percent on the week. The spark was oil. Brent crude fell for a third straight session as worries about Saudi supply disruptions faded, and cheaper oil takes some heat out of inflation.

That matters because the Federal Reserve raised interest rates by a quarter point on Wednesday, its first hike in three years, and hinted more could follow - markets currently give roughly 60 percent odds of another move next month. The Bank of Japan joined in, lifting its rates to a 31-year high.

Higher rates and a firmer dollar usually lean against metals, which is why gold's gains stayed modest even as silver ran. Next week tells us whether softer oil or hawkish central banks sets the tone.

There's a rule most investors learn early: when interest rates rise, gold falls. It sounds airtight, and on Wednesday it faced its first real test in years. The Fed raised its benchmark rate by a quarter point to a range of 3.75 to 4 percent, the first increase since July 2023, and the vote was unanimous. By Friday, gold had climbed to a weekly high above $4,400.

That reaction wasn't a fluke. It's what gold has done through almost every hiking cycle of the modern era, and the record is worth examining in full.

Why gold’s supposed to fall

The logic behind the rule is simple. Gold pays no interest. When the return on cash goes up, holding gold means giving up that return, so the metal should become less attractive with every hike. Higher US rates also tend to pull money into dollars, and a stronger dollar makes gold more expensive for buyers everywhere else.

None of that is wrong, exactly. It's just incomplete, and the gap shows up clearly in the price history.

What fifty years of data show

The Fed has run five hiking cycles since 1994. Gold rose during four of them. The only loss came in 1994-95, and it was less than three percent. The average move across all five was a gain of a little over 14 percent, which is a strange result for an asset that's supposed to wilt every time rates climb.

The star exhibit is 2004 to 2006. Over those two years the Fed raised rates at 17 consecutive meetings, taking its benchmark from 1 percent to 5.25 percent. Gold's answer was a 51.5 percent gain.

Go back further and the rule looks even worse. Between the end of 1976 and January 1980, US rates roughly quadrupled on their way to 20 percent. Gold went from about $135 an ounce to $835.

Why the rule keeps failing

Two things undermine it.

The first is timing. Markets move on expectations rather than announcements, and by the time Wednesday's hike arrived, traders had priced it at better than 90 percent odds. The event itself confirmed what everyone already believed, and confirmed events rarely move prices much.

The second reason matters a lot more. Gold responds less to the level of interest rates than to the race between rates and inflation. A central bank raising rates because inflation is hot is telling you that inflation currently has the lead. If your savings earn 4 percent while prices rise faster than that, your cash is still losing buying power, and gold has always done its best work precisely when cash quietly loses value.

That's why hiking cycles so often coincide with rising gold. The hikes and the gold price are both reacting to the same underlying problem.

Where that leaves us

Wednesday's statement kept the phrase "inflation remains elevated," and the Fed's own projections show 16 of 18 officials expecting at least one more hike before the year ends. Markets currently lean toward another quarter point in December.

So the question for gold over the coming months is less about how high rates go and more about whether they climb fast enough to get ahead of inflation. In 2004, they never really did, and gold spent two years telling everyone so.

This time there's an extra weight on the scale. The US national debt crossed $40 trillion in August, and the interest bill on it now runs ahead of the entire defense budget. Every rate rise makes that bill bigger, which puts a practical ceiling on how far the Fed can push.

Rates that can't get ahead of inflation are the exact conditions gold thrives in, and nothing about a $40 trillion debt suggests they're changing soon. This precious metals bull market still has years left to run, and last week's close above $4,400 tells me investors are only just starting to wake up.

That’s all for this Sunday, folks. See you on Tuesday.

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Rick Adams
Founder, GoldBuzz
rick@goldbuzz.com