Remain Long On Gold And Gold Mining Stocks

Many people see the upcoming rate hike of the US Federal Reserve, the low inflation rate of today, and the possibility of a dollar to remain strong, as factors that support a lower gold price. This is a very conventional theory that drives gold bugs crazy and is supported by many traditional and bearish analyses. One of the parties that shares this opinion, for example, is Goldman Sachs.

Nevertheless, not everyone has these traditional thoughts about gold. Canaccord Genuity, for example, recently spoke about the reason why analysts of the company think that this kind of a conventional approach does not apply. In a research note, they wrote why raising interest rates, low inflation, and a strong dollar are not bearish signs for gold, at least not this time.

Bad Times For Gold

First of all, Canaccord recognizes the general correlation between periods of contraction and bad times for gold. This was the case for the last three cycles, when the Fed mechanically raised interest rates by 25 points after every meeting.

The emphasis of Canaccord is on ‘mechanically’, however, something that does not apply as much at the moment since the Fed is clearly focused on economic progress as its most important goal. In these kinds of situations, gold actually performed rather well in the past.

Looking at 1986-87 you will understand that despite a rate hike in December 1986, gold stocks were actually up. This happened until the second hike of the Fed in that cycle. This means that if the Fed decides to raise interest rates in September, the second wave might only come in December, which can only take place if they take into account a gradual implementation of their strategy. In this scenario, the door is still open for a cyclical rally in gold and gold mining stocks.