Will interest rate hikes kill gold? Research institutions: The current situation is more like 1978, and gold is standing on the eve of the next big rally.

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The Federal Reserve's hawkish stance continues to suppress sentiment in the gold market. After initially breaking below on June 24, spot gold once again lost the $4,000/oz psychological barrier on June 25. Since hitting the historical high of nearly $5,600/oz at the end of January this year, the gold price has cumulatively retraced about 29%.

The market generally attributes the current decline to more hawkish policy signals from the Federal Reserve. Against the backdrop of expectations for rates to remain higher for longer, the attractiveness of dollar assets has increased and the allocation value of gold, a non-interest-bearing asset, has been significantly squeezed.

However, Asymmetric Research offers a different view, arguing that it is inaccurate to equate rate hikes with weaker gold prices. The firm points out that historical experience shows that the key variable determining the medium- and long-term trend of gold is not the absolute level of nominal interest rates, but whether the Federal Reserve can effectively control inflation, and whether the economy has the fundamentals to return to robust growth.

Within this analytical framework, the current macro environment is more similar to 1978—that is, the eve before the final round of inflationary cycle intensification and a new round of upward movement in gold in the 1970s. This historical reference provides an important benchmark for judging the current gold price trend.

Experience of the 1970s: Gold once rose in tandem with interest rates

For a long time, investors have generally believed that rising interest rates increase the opportunity cost of holding gold, thus suppressing its price.

But Asymmetric Research points out that the history of the 1970s does not support this view. At that time, U.S. interest rates continued to rise, but gold prices maintained an upward trend for most of the time.

According to the firm's analysis, the periods of marked gold pullbacks in the 1970s mainly occurred after the Fed’s rate hikes drove the economy into recession. Even so, the average gold retracement was about 19%, and usually resumed its upward trend about four months later.

The two phases that truly ended the gold bull market occurred between 1975 and 1976, and after 1983. Both periods had one thing in common: the market believed that the Fed had successfully defeated inflation while the economy entered robust expansion. For example, U.S. GDP growth exceeded 5% in 1976; from 1983 to 1993, the U.S. economy grew at an average annual rate of over 4%.

The current environment is more like 1978, not the start of a gold bear market

Asymmetric Research believes that the current U.S. economic environment is highly similar to the late 1970s.

The firm’s report points out that the current U.S. Consumer Price Index (CPI) trend may be replicating the late 1970s path. If historical correlation continues, the current stage may be similar to 1978, just before the final round of accelerating inflation and the takeoff in gold prices.

In this scenario, gold is not in a long-term bear market but may be in a correction phase ahead of the next upward cycle. The research firm believes that the market is overly focused on interest rate changes while underestimating the persistence of inflation and the constraints that fiscal pressures impose on future monetary policy.

In an era of high debt, the Fed's room to raise rates is more limited

Asymmetric Research notes that, compared with the 1970s, the U.S. financial system's capacity to withstand high interest rates has clearly declined. This is because the ratio of U.S. federal debt to GDP has reached three to four times that of the 1970s, and the fiscal deficit as a percentage of GDP is also significantly higher.

This means that even if the Fed wants to continue raising rates to curb inflation, the pressure of high rates on government financing costs, economic growth, and the stability of financial markets is much more pronounced. The research firm believes that the current environment is unlike the early 1980s, when the Fed was able to completely end the inflation cycle through aggressive tightening.

The gold pullback may present a buying opportunity

Despite the recent rapid drop in gold, Asymmetric Research still maintains a bullish view. The firm’s baseline scenario suggests that the downside for gold is limited, and the current selloff may provide a buying opportunity for long-term investors.

Based on data from the past 30 years as well as historical pullback data over more than 50 years, the firm believes the gold price bottom may be near $4,000. Calculated by the median of the largest pullbacks in the past 30 years, the reasonable gold bottom is around $4,030/oz; referring to 50+ year cycles, in extreme cases, it may fall as low as $3,640/oz.

In other words, even if gold continues to correct, the downside may already be relatively limited.

The next uptrend in gold depends on inflation and dollar direction

The previous major gold bull market was mainly driven by central bank buying, geopolitical risk, and inflation fears. The recent rebound in the dollar and the Fed's hawkish policy stance have weighed on gold. But Asymmetric Research believes that if inflation fails to fall back rapidly in the future and the Fed is constrained by a high-debt environment, gold may still usher in a new cycle of gains.

In the firm’s view, the market is repeating the key juncture of 1978: investors are selling gold due to short-term rate pressures, but the real long-term trend will be determined by whether U.S. inflation gets out of control again and whether U.S. monetary credibility continues to be challenged.

Risk Warning and DisclaimerThe market has risks and investment should be made with caution. This article does not constitute individual investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, views or conclusions in this article are suitable for their specific situation. You are responsible for your own investment decisions. ```