How will gold perform as interest rates rise?
Posted on 16 March 2010 with no comments from readers
All eyes will be on the Federal Reserve interest rate statement tonight, and whether or not the rate actually rises there can be no doubt that ultra-low interest rates are not going to last forever, even if financial markets sometime seem to behave as though this was the case.
So what will happen to the gold price as interest rates go up? The most superficial analysis is to say that gold does not pay interest so investors will take their money out of gold and put it into cash.
Investment logic
But this is a complete nonsense. Investors will also look at why interest rates are going up. Is it because money printing by the Fed now threatens a deluge of inflation? Is it because the bond market looks unstable and investors are demanding a higher risk premium?
Indeed, you have to consider the underlying security of cash as an asset in such circumstances. Will the dollar devalue as inflation erodes its buying power? And how do you hedge against that?
George Soros got it right recently when he said that gold was the ‘ultimate bubble’, that is to say the last asset class in the chain to become a bubble before the whole cycle starts again. For in past financial crises the clear pattern has been bank failures then a bond market crash and a rush into precious metals.
Government intervention
Government intervention on a historic scale has mitigated the bank failures but led to an even greater issuance of government paper, and merely delayed the inevitable bond market crash that will come as – wait for it – interest rates go up.
Gold then becomes the final safe haven asset and the limited supply of gold means that its value will surge to unheard of levels. Dr Marc Faber recently suggested that $1,000 gold might be seen as similar to the Dow crossing 1,000 in 1982.
Arabianmoney.net editor and publisher Peter Cooper explains in far more detail how gold price could pass $5,000 and head even higher over the next few years in his latest book published on Amazon.com this week.
no Comments posted by readers:
Not sure what the unnamed banker was trying to accomplish with such a bizarre false rumour. Quite unfortunate that the public is forced to support such mendacious characters with subsidies and backstops.
Failed bankers should be reformed, retrained, and put into productive lines of work. Society does not benefit at all in lavishing these children with huge welfare “bonuses” for them to sit around and spread absurd speculative rumours.
Ed Note: Well to be fair I spread the rumor and he was just telling me his bank’s view at the time. His bank still makes huge profits in Asia and nobody grumbles about bonuses when this is happening.