Practice vs. Theory
There is a lot of theory involved in the behavior of gold and a lot of it makes sense. So, why isn’t it working now in the real world? Just look at the three last Fed rate hikes. In theory, we should have seen the precious metal decreases, but in practice prices increased.
Gold is up by over 6% [i] since the Fed increased rates on December 14th. It rose 13% in the two months that followed the previous rate hike in December 2015 and around 6% following the June 2006 interest hike.
The easiest explanation is that things that work in theory something encounter other things that happened in real life. For example, Donald Trump added a level of uncertainty to global markets that may have been enough to balance the interest rate changes. When investors feel uncertainty, they, theoretically, turn to instruments that are historically viewed as so-called “safe-havens” such as gold and the Japanese yen.
Of course, Trump is not the only factor injecting uncertainty into global markets. The German and Netherland elections are now on the table and Britain with its Article 50 still hangs at the balance. And what about France? Le Pen has stated – or rather threated – that if she wins the nation’s presidential election she’ll resume control of the central bank, print money to fund welfare and lead France out of the euro.
We should also keep in mind that gold, historically, often experiences seasonal gains Before the Lunar New Year in January. In China, gold is a common gift for the New Year.
This is an important lesson for investors though. Even theories that seem clear are, after all, just theories, and informed traders should collect all the information and consider all the factors involved before making decisions. For investors, knowledge is indeed power. Stay informed, trade with knowledge and stay ahead of the market.
Found this article interesting?
Want to see how quickly you can take your first steps in the world of online trading?
iFOREX has one of the most popular training packages.