Mike (Mish) Shedlock | Feb 23, 2017 04:37AM ET
Here are two different looks at Fed rate hikes since Volcker. The charts are the same, but one presentation is a lot funnier than the other.
The above image from the New York Times article A History of Fed Leaders and Interest Rates.
Here’s an alternative view courtesy of @HedgeEye.
Let’s take the fist chart and see what correlations exist between rate hikes and the US dollar index.
Rate Hike Cycle vs. the US Dollar
Conventional wisdom suggests rate hikes will support the US dollar.
US Dollar Conventional Wisdom vs. Rate Hike Reality
British Pound 8-Year Cycle
The above chart from You’ve heard of Kondratiev waves – now meet the Frisby flux, the pound’s eight-year cycle by Dominic Frisby.
Rate Hikes Bad for Gold?
Conventional wisdom also says rates hikes are bad for gold. Let’s take a look.
How’s that conventional wisdom doing?
Why is it that nearly all of mainstream media preaches that rates hikes will strengthen the dollar and rate hikes will be bad for gold?
Gold Does Well in These Environments
1. Deflation
2. Hyperinflation
3. Stagflation
4. Decreasing faith that central banks have everything under control.
5. Rising credit stress and fear of defaults
Gold Does Poorly in These Environments
1. Disinflation (1980 to 2000 is a perfect example. There was inflation every step of the way but gold got clobbered).
2. Increasing faith in central banks’ ability to keep things under control (Mario Draghi’s “Whatever it takes” speech triggered a prime example)
Gold does worst in periods of prolonged disinflation and in periods of rising faith in central banks.
Moments in Gold History
Conventional Wisdom Roundup
Gold does not necessarily rise and fall with interest rates, jewelry demand in India, or any other widely believed nonsense. Rather, gold has moved in conjunction with perceptions as to whether or not the Fed and central banks have everything under control.
If you think everything is under control, and do not want insurance against a currency crisis or another debt crisis, then dump your gold.
If you believe as I do, that everything is not under control, or if you want some insurance, then take a position in gold.
Either way, stop listening to conventional wisdom regarding gold. The charts show how laughable that wisdom is.
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