Gold fell to the lowest level in dollar terms since 2009 yesterday after the Fed’s “historic” 25 basis point interest rate rise on Wednesday. The rate hike has been heralded as the “end of cheap money.” This may or may not be the case but what is more important for precious metal buyers is the impact of potential rising rates on gold prices.

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Most pundits on Wall Street are nearly universal in seeing the rate increase as negative for gold. Especially vocal in this regard has been Goldman Sachs. One headline this week, screamed ‘Gold sags as higher U.S. rates are ‘very negative’ for bullion’. However, the consensus is likely once again wrong and it is important to examine the widely held belief that rising rates are bad for gold, by looking at the data and the historical record.

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Source: New York Federal Reserve for Fed Funds Rate, LBMA.org.uk for Gold (PM fix)

Firstly, let’s look at the basis for the simplistic “rising rates will lead to lower gold prices” narrative. It comes about due to the belief that rising rates will lead to higher yields and thus investors allocating more funds to bonds and deposits. As gold is a non yielding asset, this therefore is negative for gold or so the narrative goes.

Goldman Sachs is the leading propagator of the narrative and is unquestioningly quoted in the media as seen in this article from Bloomberg in October:

“The Federal Reserve will probably raise interest rates in December and follow that with a further 100 basis points of increases over 2016, according to Goldman Sachs Group Inc., which said the shift in U.S. monetary policy will hurt gold”

As with all narratives, there is a small degree of truth to it. However, as ever the devil is in the detail. Janet Yellen increased the Fed’s key interest rate by a meager 25 basis points to between 0.25 percent and 0.50 percent. Thus, ultra loose monetary policies will continue for the foreseeable future – an environment that is unquestionably favourable to gold.

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Fed Funds Rate and Gold Price (USD) – 2003 to 2007

Despite the rate rise, depositors are not getting the benefit of the rate rise. Quite the opposite, immediately after the decision, many of America’s leading banks announced that they were increasing their prime lending rates — the rate at which individual banks lend to their most creditworthy customers — to 3.5 percent effective the following day. Already, many American companies are being impacted by the rate rise. The deposit rate, however, which is the interest rate banks pay to its account holders, will remain unchanged.

The average interest rate on a savings account is a tiny 0.5 percent right now, according to Bankrate. Even after the rate hike, interest on deposits will remain near zero and are negative when inflation is taken into account. Thus, savers are losing money keeping their cash on deposit and today they are also at risk of having their savings expropriated due to the real risk of bail-ins in most G20 nations.

Negative real interest rates is positive for non-yielding, but counterparty risk free gold bullion.

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Having looked at the basis for the simplistic narrative, lets now look at the data and historical record.

The most recent example we have of rising interest rates is when the Fed increased interest rates from 2003 to 2006. As can be seen in the charts and table above, in June 2003, the Fed funds rate was at 1% and by June 2006, it had been increased to over 5.5%.

At the time, there was a similar narrative that rising interest rates would scupper the gains gold had seen in 2001 and 2002. Instead, the period of rising interest rates saw gold rise from $361/oz in June 2003 to $633/oz in June 2006 – a gain of 75%.

The other data set a