Where are we now? Below is a chart from BCA showing the Fed Funds Rate Cycle. In essence, this chart neatly illustrates what the interest rate cycle imposed by the U.S. Federal Reserve looks like. The red circle indicates where we are right now: Phase IV, also known as the “easing” phase of the monetary policy that was enacted in 2008 in the U.S., better known as quantitative easing (QE).
As we know, the Fed enacted QE to stimulate our nation’s economy. Right now we’re benefitting from our placement in Phase IV of this cycle because it is in this phase that the Fed is able to keep interest rates low, keep reserve requirements low and continue printing money. Similarly, when money is “easy,” businesses can find funding for projects and consumers have easier access to credit.
Historically, Phase IV (as well as the shift towards Phase I) are the best for equity investors because stocks usually rise during these two positions in the cycle.
Why these phases are good for gold, too. We have been in Phase IV of the Fed Funds Rate Cycle for a few years now, and are expected to remain here into 2015. Eventually the Fed will have to start tightening again and raise rates, although the numbers should remain relatively low for a while. Once this begins, we will move into Phase I.
When it comes to the performance of gold and gold stocks, history indicates good times are ahead based on where we are in the cycle. Take a look at the tables below showing median returns during the cycle dating back to 1970 and 1971. You’ll see that for gold and gold stocks, Phase IV and Phase I both show the highest median returns.
|Spot Gold, From June 1971||TSE Gold Miners, From July 1970|
|Phase I (Easy, Hiking)||11.8%||Phase I (Easy, Hiking)||16.2%|
|Phase II (Tight, Hiking)||2.2%||Phase II (Tight, Hiking)||-8.8%|
|Phase III (Tight, Cutting)||-4.3%||Phase III (Tight, Cutting)||-15.9%|
|Pase IV (Easy, Cutting)||9.2%||Phase IV (Easy, Cutting)||24.2%|
Note: Excluding the two-month Phase II period spanning the October '87 stock market crash.