http://network.nationalpost.com/NP/blogs/tradingdesk/archive/2010/03/09/gold-stock-performance-in-rate-hike-cycles.aspx

With the market anticipating rate hikes from the Fed beginning late in 2010 or early in 2011, investors should be keen to know what gold stocks do before and after such tightening cycles.

On average, gold equities outperform the broader S&P/TSX composite index in the 12 months prior to the hike and lag for roughly nine months afterwards, according to analysis of the last nine cycles from RBC Capital Markets. Then they rebound and eventually peak around the 18-month mark,

Yet the performance patterns demonstrate a wide range. Analysts at RBC looked at the extreme cases and decided there will be less volatility this time around.

“With greater monetary policy transparency compared to majority of the tightening cycles, we expect the market reaction to the first rate hike to be more muted than in prior periods,” they said, citing key drivers such as negative real short-term interest rates, central bank gold buying and strong demand from gold ETFs. RBC anticipates this will support gold in the US$1,000 to US$1,250 per ounce range throughout 2010.

After the hike, however, the analysts forese gold equities underperforming the market for a period of 12 to 18 months. As a result, they will likely recommend investors reduce their gold exposure in the second half of 2010.

“Although inflation concerns could re-appear and provide a stimulus for higher gold prices as observed in the early 1980’s, we believe we are currently in a deflationary environment, although the extraordinary amount of monetary and fiscal stimulus could create significant inflation concerns with a full global economic recovery likely in 2011.”

Since gold stocks have lagged the broader TSX since the fourth quarter of 2009, 2011 doesn’t necessarily have to be a bad year for these equities. The wide range of relative performance patterns of both spot gold and gold stocks in the past nine cycles also suggests more good times may lie ahead.

Jonathan Ratner