Last week we touched on interest rates and the price of Gold. Today, we thought we’d explore the question of how interest rates affect the price of Gold (and Silver) in greater depth. This is because the U.S. Federal Reserve, which is neither Federal or has any money in reserve, is approaching the anticipated date of 16th September of raising U.S. interest rates, for the first time in almost a decade.
Some believe that the Gold Price, which although rising, has not risen quite as high as the terrible stock market figures would suggest, is precisely due to the markets “waiting” to see whether the U.S. raise interest rates:
One bullion trader in Hong Kong said there was now unlikely be “a big move” until a Federal Reserve rate setting meeting in two weeks, when the US central bank could vote to increase rates for the first time in nine years amid broadly positive signs on the jobs market. This is dominating all other trends, the trader noted, adding that gold “is not even reacting much to what we are seeing in the equities market (The Week, September 8th 2015)
Maybe this one bullion trader read the Telegraph, because this view preceded his quote by two days in The Telegraph, which reported that, “The apparent cause is that the “US Federal Reserve is still on course to increase the key central bank borrowing rate before the end of the year”, the paper says. A US jobs report on Friday showed that unemployment in the world’s largest economy is at an eight-year low, adding weight to the view that rates will rise soon. This “will dull the precious metal’s appeal, as it offers no interest, or income, to investors”. (The Telegraph, 6th September 2015)
A U.S. interest rate hike seemed to be a very predictable outcome back in July for late this year. But that was before the Chinese stock market crash(es), the devaluation of the yuan (which makes Chinese products cheaper on the global market than American). The only factor that might look a green light to increase rates would be a lowering of U.S. unemployment rates. And that was exactly what was announced last week. But even a cursory glance at the figures reveals that the real unemployment rate is nearer 18% rather than the advertised 5%. Very briefly, the U1 figures count people who have been unemployment for just 15 weeks or more. But there are U2, U3, U4, U5 and even U6 figures, to include people who are unemployed long term or even people working part time, because they have been forced out of their full time professions, that were not taken into account last week.
So, it does look as if the stage is being set, so to speak, for a “justified” interest rate hike, based on “lower” unemployment, either this month or soon after. This is bad news for one reason. There is now more consumer debt than ever before. Since the recession hit in 2008/2009, it is hard to believe that Quantitative Easing and the daily “optimistic” economic news reports could lull so many consumers into forgetting the fundamentals that lie beneath their feet. It really reminds me of the part of us that builds houses on flood plains or worse, multi-mullion populated cities over massive fault lines in the earths crust. But we do.
We will look shortly at how a rise in interest rate may affect the price of Gold and Silver. But first, a quick look at the U.K.’s personal debt figures. Somewhat strangely, the Daily Mail actually chose today to publish a large research article on Britain’s debt. I hope this is a sign that the Bank of England will not follow America. Or it may be a warning to the British public that our interest rates will also begin rising imminently:
“Households are sitting on a £173 billion debt time bomb after being lured into a spending splurge by banks and credit card companies. An investigation by Money Mail has uncovered the startling rise in debt levels due to people splashing out on new cars, TVs, conservatories and home improvements. But with a rise in interest rates imminent for the first time in more than eight years, fears are growing that many families will be left struggling with repayments. Bank of England governor Mark Carney has sent a letter to all fund managers asking for reassurance they are able to deal with an anticipated rush of investors making emergency cash withdrawals to cover their mortgages. Meanwhile, the amount of borrowing being taken on by households continues to grow at a startling rate, spurred on by hundreds of offers for credit cards and loans.”
If you’d like to know what a billion really is, please enjoy this very short video “How Many is a Billion“. The term for billion used to be different in English and American, but now we Brits have changed our definition to fit in with our cousins over the pond. As I learnt from the video, either way I think it is safe to say that Global debt has reached “bazillions” of dollars, pounds and units of currency!
The quiet between the last economic crash and the imminent, and I believe far larger and long-reaching, one, was the time to get out of debt. Many, many people did just that for the four years following 2008 up until 2012 but then the pattern changed:
“There has been a marked change in behaviour as the economy has recovered: in nearly every month for the four years to September 2012 consumers paid off more than they borrowed, with banks reining in credit limits and restricting loans and overdrafts, but since then the trend has reversed with almost every month seeing increased borrowing.” (The Guardian, New Consumer Debt reaches Seven Year High)
The tragic word in this extract is the word “recovered.” Sadly and tragically, the truth is the economy didn’t recover. It had a white-wash and just like a heavily leaning wall, a coat of paint never addresses the fact that the foundations are built on the bog of Quantitative Easing and unbelievable Debt to GDP ratios.
Now, I believe, is the time to urgently get into a more sustainable way of life, if we have not already done so; from lowering petrol to energy costs in which way we can, to pay off debt, and to move into holding some physical gold and silver in one’s portfolio. I also believe we are on the cusp of the time to get out of stocks. But that is personal measured opinion based on the fundamentals, which have not only not changed over the last seven years but have increased. It is my opinion that because the world’s currencies are being devalued lower through money-printing, a severe reset is overdue, much like building pressure under the earth’s crust. It may occur over a sustained period of time or have a few severe jolts, but I believe 2015 heading into 2016 is going to come as a shock to many. Look what CBS Money Watch wrote, again, just this yesterday:
“For investors, consumers and businesses it is the question of the moment: Will the Federal Reserve raise interest rates later this month for the first time since 2006? If policy makers do push up short-term interest rates at the Federal Open Market Committee’s Sept. 16-17 meeting, the consensus is that the move will be small, with most forecasters expecting a hike of no more than 0.25 basis points. But some experts also predict that starting next year the central bank is likely to raise rates faster than many investors expect as inflationary pressures start to build.”
So, if we have some cash to invest and we are not sure what this all signals for Gold (and Silver), let’s look at the four views on this subject:
1) The first view is the one touched on by the Hong Kong bullion dealer quoted at the beginning of this piece, that higher interest rates mean Physical Gold and Silver become less attractive investments, because they don’t earn interest. Therefore, it is a commonly held view that investors instead flock to investments which give a return on a rising or high interest rate. According to this view, a person would not buy Gold or Silver now, even if the price, particularly of silver, is under-valued.
2) The second view is similar but not quite the same. It is more of a middle-ground view that doesn’t deny the above but says, “the best time to buy gold is when rates are low but set to move higher, and the best time to sell gold is when rates are high but set to move lower.” (The Cheat Sheet) According to this view, the time to buy Physical Gold (and Silver) is most definitely now!
3) Then, as we move out of this view, we come to what I’m going to call “Nonchalant Valley,” in that some believe there is no correlation between interest rates and the price of Gold, because too many other factors play into the value of Gold: “What are the conclusions for the gold market? As we have pointed out in an earlier edition of the Market Overview, the Fed’s hike alone would not negatively affect gold prices.” This view is interesting because it actually comes from Kitco Commentary. Kitco is an international company that puts out very useful historical gold and silver price charts, which we at Bleyer often use, but it is actually a gold and silver trading company as well. So, if I were a consumer, I would want another source to rely on, than the very one that sells the product they are talking about. I called this view of Kitco’s fascinating, because now we get to the fourth view.
4) I’m going to call this view the “Historical View” because it’s based on history. Now, the caveat here is, “Does history have to repeat itself?” It often does, but does it always? Historically, although the Hong Kong trader “feels” as if Gold and Silver are investments to avoid as interest rates rise, the historical price of Gold and Silver during interest rate rises proves the exact opposite. This is where we have to ignore our feelings and look at facts:
“Gold’s mighty secular bull of the 1970s, which greatly dwarfed the 2000s one, happened during a time of high and rising interest rates! And then gold’s subsequent multi-decade secular bear in the 1980s and 1990s unfolded during a long span of interest rates relentlessly falling on balance. Gold rallying with rising rates and slumping with falling rates? That’s not in the script. Mathematically, only well under a third of gold’s daily price action was directly explainable by short- or long-term interest rates. This wouldn’t be the case if higher rates made gold far less attractive to investors and vice versa, so today’s popular thesis about gold and rates is simply false historically. Actually well over two-thirds of the gold-price action in our lifetimes had nothing to do with the changing interest rates!” (ZeroHedge)
So, why is Kitco’s view fascinating? Because they produce the Gold and Silver Historical Charts, so why not mention the above? It is true that they reach the same conclusion as ZeroHedge, in that interest rates and the Gold prices do not have the close link many believe. But any financial store of value (Gold and Silver) will probably be affected to some degree by the rise or fall of another “store of value” (the paper currency and therefore interest rates on that paper currency).
So, in conclusion, when we read headlines soon on Interest Rates, let’s bear in mind that at the very best, we are passing a small window of time to buy Gold and Silver (View 2) or we are, no less or more likely to be, heading into a time when the price of Gold and Silver is massively affected by external factors more than those interest rate hikes, regardless of what the headlines may shout. (View 3 and 4). The long term historical figures don’t support View 1, even if a short term gut feeling instills in the Hong Kong trader to get into assets that offer interest returns. I fear that may drive him deeper into stocks, just before stocks crash in a unique and elongated fashion.
I would say research and take note of interest rates, but more for the affect rising rates will have on our mortgage repayments! But if we can, I believe it would be wiser to just let in a little white noise re: interest rates but spend more time focused on the bigger issues that affect the price of Physical Gold and Silver, which would be: currency collapses (Greece, Euro, Dollar), war or mumblings of war (China vs. Japan in the South China sea, Russia, Iran and the Middle East), currency wars (between China and Russia vs. the U.S., although by proxy the interest rate hike by the Fed will be, if it occurs, a return shot across the net from the U.S. to China’s devaluation of the Yuan), actual figures for Gold and Silver demand in ounces vs. the paper price we see everyday, and finally the unexpected, such as natural disasters, like earthquakes. Japan’s economy tragically crashed and has never recovered from the earthquake and tsunami of 2011)
NB: Breaking news this week to watch over the coming days: “Russian President Vladimir Putin has drafted a bill that aims to eliminate the US dollar and the euro from trade between CIS countries. This means the creation of a single financial market between Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and other countries of the former Soviet Union. Today, some 50 percent of turnover in the EEU is in dollars and euro, which increases the dependence of the union on countries issuing those currencies. Outside the CIS and Eurasian Economic Union (EEU,) Russia and China have been trying to curtail the dollar’s dominance as well.” (R.T.) “Most people don’t realize this, but more U.S. dollars are actually used outside of the United States than are used inside this country. If the rest of the planet decides to stop accumulating dollars, using them to trade with one another, and loaning them back to us at ultra-low interest rates, we are going to be in for a world of hurt.” (Michael Snyder, The Economic Collaspe, 2nd September 2015). If this law goes through, I expect a rush into Gold and Silver coins by U.S. citizens, who haven’t already done so, which will affect global supply and demand.