What did not come as a surprise to markets around the world, the Federal Open Market Committee hiked their benchmark lending rate last week by 25 basis points, or 0.25%, to the current rate of 1%. Fed fund futures traded on the CME showed about a 94% probability of a rate hike going into Wednesday’s announcement.

Despite the virtual certainty of a rate hike, there were dramatic moves in the financial markets across a wide range of instruments.

The S&P 500 immediately rallied after the announcement, and, along with the Nasdaq and Dow, finished the week with a noticeable gain of around 0.50%. “Stocks in general are much more attractive relative to other liquid asset classes,” said Diane Jaffee, portfolio manager at TCW, a Los Angeles-based asset manager with nearly $200 billion under supervision.

But stocks weren’t the only asset class that popped. On the fixed-income front, Treasury note and bond futures absolutely surged after the announcement. The yields on 10-year Treasury and 30-year bonds notes saw an instantaneous increase and finally broke a two-week-long losing streak.

For currencies, the US dollar index tumbled to the lowest level in over a month as a result of the Fed’s slightly hawkish outlook. The weak US dollar gave rise to higher gold and silver prices, as the most popular precious metals in the world are dominated in US dollars.

In terms of commodities, gold, silver, and palladium were all up well over 2% for the week to post the best week since February. Most of the losses for precious metals in the past couple of weeks have been recouped. Generally speaking, higher interest rates are bad for assets like equities and gold, because an increase in borrowing costs means it gets more expensive to borrow money to purchase these assets.

Nevertheless, the CEO of investment firm Amplify Investments said, “I am bullish on gold prices as I believe the U.S. dollar will continue to weaken.” From a global-macro perspective, a weakening US dollar is certainly not out of the cards, and this would ultimately benefit precious metal assets and other commodities, yet a weak dollar is not the only bullish argument for gold; global political uncertainty is definitely contributing to the rise.

Despite the gold/interest rate logic, investors seemed largely unfazed by the reality of an increased cost of borrowing. In fact, many interpreted it as an overall positive sign that the economy is finally normalizing and moving away from a zero interest-rate environment.

As noted in her speech, Fed Chair Janet Yellen expects the FOMC to raise rates at least two more times this year and at least three times in 2018. For reference, rates were only raised once in 2016.

Contrary to the current state of politics in the US and abroad, the state of US monetary policy seems to be pretty clear: the era of free loans is officially over, and policy is tightening to the direct benefit of stocks and dollar-dominated commodities, like gold.

After an impressive period of six consecutive weekly gains for equities, optimism officially wore off and skepticism undoubtedly took over, at least for a brief period last week. The S&P 500 and the Dow Jones Industrial Average both closed negative for the week, while the Nasdaq 100 continued its historical eight-week-long winning streak. The decline in stocks came on the heels of a 5% intraday crude oil sell-off, which was the biggest decline in the price of crude oil in well over an entire trading year.

At a time when institutional investors increased their net-long positions in crude oil to record levels, betting that OPEC actions would stabilize the market, the oil “crash” seemed to be exacerbated by forced selling and capitulation of bullish bets gone awry after trading in an extremely narrow range since the beginning of the year.

Unfortunately for many investors, the oil sell-off spilled into the equity markets. The S&P 500 energy sector fell 2.5% on Wednesday, making it the worst performing sector in the entire stock market. Needless to say, WTI oil took everyone by surprise and by falling beneath the critical level of $50 a barrel.

Shares of energy companies didn’t see any reprieve on Thursday and Friday, either, as oil continued to plummet again, this time below $48 a barrel.

“In the long run, either OPEC will cut, or demand will pick up a bit of this extra supply. It’s a bit of a tango around the middle-term,” said Michael Poulsen, oil risk manager at A/S Global Risk Management Ltd.

Until then, the record level of oil stockpiles seems to be the driving force behind the plunging price. The US Energy Information Administration reported that crude oil inventories rose by 8.2 million barrels, well above the forecasted 1.1 million.

Dramatic plunges in the price of oil are particularly unnerving for many investors, because this is precisely what instigated a temporary bear market in equities circa late 2015.

During this time, when oil was trading near $30 a barrel, there was a lot of chatter on Wall Street that many companies who based the majority of their revenue on high oil prices (above $50-$60/barrel), like energy companies, would quickly become insolvent.

Furthermore, when the price of oil really started to tank in 2015, the correlation between WTI crude oil and the S&P 500 was extremely high, (almost near 1.00). This meant that the S&P was catching any significant upside or downside movement in oil, and this created tremendous volatility in the market. As such, investors rapidly moved to safe-haven assets like gold and bonds.

Therefore, given the current situation of a borderline lack of physical infrastructure to store the mounting supply of oil in the US, and the fact that alternative transportation measures like Uber and Tesla are increasing in popularity, there is genuine concern about oil’s future in the modern world.

Of course, this is only one side of the oil thesis. The bullish side sees demand increasing from China and emerging economies which analysts predict will send the price of oil above $100 a barrel. This would, as a result, benefit energy companies and broad-based incises around the world.  

Ultimately, nobody knows what the future holds for oil, but there seems to be one certainty: if oil continues to decline or see large price swings, the effects will unequivocally be felt in the equity markets which will likely be a direct boon for gold owners.

Spot gold prices gyrated around the $1,200 per ounce level on Friday after the U.S. Labor department reported that more U.S. jobs were created than expected in February. The latest non-farm payrolls report revealed 235,000 new jobs were created, above expectations for around 190,000 new jobs.

The data gives the green light for the Federal Reserve to hike interest rates at its March 15 meeting, economists said. “The 235,000 gain in non-farm payrolls in February will erase any lingering doubts that the Fed might not hike interest rates,” at the March meeting said Paul Ashworth, chief U.S. economist at Capital Economics.

Inflation Clues

The official unemployment rate was unchanged at 4.7% in February. There is already evidence that the low unemployment rate is putting upward pressure on worker’s pay. Notably, average hourly earnings edged higher to an 2.8% annual growth rate in February. Wage growth is considered to be an inflationary signal and provided support to gold in the wake of the jobs release.

Bigger picture, the gold market has been under pressure since late February, falling from the $1,258 an ounce area to the $1,196 area just ahead of the jobs report. However, the gold market actually spiked higher to the $1,207 level after the report was released as traders reacted to the increase in average hourly earnings.

A March Rate Hike Is Baked into the Cake

A Federal Reserve interest rate hike has been priced into the gold market on the recent decline from the $1,258 area. Market expectations have shifted dramatically over the last month in regards to a March interest rate hike. One month ago, the MNI PINCH (Probability of Interest Rate Change) indicator revealed at 16.9% expectation for a Fed rate hike on March 15. Just ahead of the jobs report release, those expectations had skyrocketed to 85.5%.

Typically, Federal Reserve interest rate increases are thought to be a negative factor for gold as the yellow metal pays no interest. Higher interest rates compete for investor’s assets and are thought to detract interest in the gold market.

$1,400 Gold In 2017

Current conditions, however, reveal that investors are purchasing gold for others reasons besides the low interest rate environment. Wall Street analysts remain bullish on the prospects for gold in 2017. A March 9 BofA Merrill Lynch Global Research report outlined the positive backdrop for gold and highlighted a $1,400 per ounce year-end target for gold.

“Gold has come under pressure in the run-up to the next Fed rate hike. While tighter monetary policy is not bullish, inflation and a range of uncertainties, including European elections and protectionism should support the yellow metal. As such, we see prices at $1,400/oz by year-end,” the BofA Merrill Lynch Global Research report said.

Alternative Assets Spike

Bitcoin, the digital currency which is created and held electronically, recently hit new all-time highs. The recent strength in the virtual currency suggests a lack of investor confidence in fiat currencies, says analyst Michael Kahn in a Barron’s article last week.

Why Invest In Gold

Uncertainty is on the rise. Gold is a time-honored alternative to paper money, and has proven portfolio diversification benefits. The stock market is within spitting distance of its all-time highs and by most measures is overstretched and overvalued. Blanchard clients are using stock market strength to rebalance their portfolio by selling partial stock positions and reallocate that into tangible assets, including gold and silver. Learn more about the reasons it is important for all investors to diversify their portfolio with gold here.

When we picture gold, we often conjure images of mining operations, vaults or perhaps a fancy retirement watch. Instead, we should imagine the halls of academia.

Duke University professor of finance Harvey Campbell has applied academic rigor to the question of owning gold. His findings are surprising. His research, emanating from a statistical and scientific approach, upends some of the conventional wisdom behind gold. Let’s look at two key discoveries that may change your understanding of the asset.

Look Abroad

In his 2013 paper, “The Truth About Gold: Why It Should (or Should Not) Be Part of Your Asset Allocation Strategy,” Harvey concludes that those considering a gold purchase should think less about the decision as an inflation hedge. Rather, according to Harvey, investors should consider demand on the international level because “a move by developing markets to hold more gold could exert substantial upward pressure on the price of gold.” What can the international community’s appetite for gold tell us about the likelihood of such a move?

China’s bar and coin demand finished 2016 exceeding totals for the last two years. In fact, the Q4 demand in the country increased by 86% year-over-year according to the World Gold Council (WGC). This growth reflects the burgeoning interest in gold among Chinese citizens who were unable to own gold before 2004 legally. Additional research from the WGC reinforces the notion that, “Investors in developing markets are willing to invest more of their income,” thereby buoying gold purchases and its value. The Chinese invest 37% of their income compared to only 17% in the U.S. The robust drive for gold among these developing markets is hardly a surprise given the commodity’s 250% gain since 2003. This outperformance surpasses the S&P 500 total return and the Barclays US Corporate Bond total return over the same period.

Interestingly, the motivation to own gold (e.g. growth in value, safe haven) differs from the factor boosting its value: international purchases. Moreover, Professor Harvey has identified a second elusive characteristic boosting the outlook for gold: the economic policy uncertainty. Let’s take a closer look.

The Most Important Number You Don’t Know 

Additional work from Harvey further illustrates why we can expect global gold consumption to continue. The professor has used a special metric called the Economic Policy Uncertainty Index (EPU) to understand how the pervasive anxiety surrounding politics can influence gold prices. Academics at Northwestern University, Stanford University and the University of Chicago developed the index to form a consistent measurement of uncertainty. The data used to formulate the index consists of three parts. First, the frequency of economic policy uncertainty discussions in major U.S. papers. Second, future tax uncertainty based on Congressional Budget Office data. Third, a survey of professional forecasters provided by the Federal Reserve Bank of Philadelphia.

Today the EPU is higher than it has ever been.

Why does that matter? “According to Prof. Harvey, gold shows a modest historical correlation with the global version of the EPU,” reports The Wall Street Journal. Therefore, a high degree of uncertainty can reasonably “translates into a bullish forecast for gold,” continues the WSJ. As the global community experiences trepidations amid Trump, Brexit, a looming ‘Frexit’, Russia and North Korea the index rises. It’s unlikely any of these major sociopolitical concerns will dissipate soon. Instead, the widespread sentiment is that we’re witnessing a secular trend.

Gold is a particularly challenging investment to value given the array of unquantifiable price influencers. However, the work from Harvey illustrates scientifically backed methods which give investors reason to agree with the professor’s conclusion from his 2013 paper: “I believe that gold should be part of a portfolio.”