When Rates Rise, Gold Stocks Suffer

Includes: GDX, GLD
by: Market Blog

By David Berman

The Federal Reserve essentially laid out a roadmap for raising interest rates when it released the minutes from its last monetary policy meeting earlier this week. What does that mean for gold investors? According to George Vasic, a strategist at UBS, it means they can expect the shares of gold producers to underperform in less than six months.

He expects the Fed will start raising its key interest rate in the first quarter of 2012. According to his research, gold stocks underperform the S&P/TSX composite index when the Fed raises rates, and gold also lags about six months before a rate-hiking campaign begins. His evidence: He looked at the last three rate-hiking campaigns, in 1994, 1999 and 2004 – an era that coincides with the Fed announcing its rate changes.

“Overall, we found that not only do gold stocks underperform when the Fed starts tightening, they start to do so six months prior,” he said in a note. “Overall, gold stocks underperformed in 16 of the 18 cases under consideration (3 episodes times 6 time intervals), and the two outperformances were marginal.”

He noted that when rates were on the rise, the U.S. dollar also tended to strengthen and bond yields rose - neither of which is good for gold, which is why gold stocks would tend to suffer.