The Interest Rate Argument Against Gold
This is a guest post by Jordan Roy-Byrne CMT at The Daily Gold.
This is a typical argument that many mainstream gold bears make.
It goes like this…. “As soon as the Fed raises rates, it will pop the Gold bubble and the US$ will bottom”
This is totally ridiculous. First, it is real interest rates that matter. Rates need to be 2-3% above the level of inflation. So right now, even if you say inflation is 0% or 1%, rates would need to go up to 2-3%. Secondly, rising rates usually follow the price of gold. It was true in the 1970s and is probably true when you look at the price of Gold in other countries. Rates rise because people don’t trust paper. Rates have to rise high enough for people to abandon hard assets and trust paper again.
Based on this factual analysis, the Fed will have to hike rates aggressively. They have never raised rates when unemployment has been rising. Even by their own admission, they won’t raise rates anytime in 2010. And why would they begin to hike aggressively when the economy is approaching zero hour and maintains no real growth of any sort?
Also, we didn’t factor in the currency weakness. Most people expect the US$ to lose value. If it loses 5% a year and inflation is 2-3%, then rates really need to be 10% to poke the bull in Gold. What is more likely for this scenario is that the Fed says inflation is 2-3% and they can tolerate it now because a weak US$ and low rates will help the economy. Therefore they’d keep rates under 1%, even though its obvious the economy is hitting zero hour- the point where new debt is not creating any real growth.
This argument is just total nonsense. Again, it is just a sound byte you hear on CNBC from the same analysts who have gotten everything wrong. They throw this out there, along with other BS, without even looking at the facts. The interest rate argument is at the bottom of a list of concerns for Gold investors.
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