We hope you are enjoying the beautiful British summer. This month’s round-up of news is going to look at the recent interest rate rise in the States and how this is creating a new emerging pattern for investors to watch closely. Something is changing. Old patterns that used to work so well are now not only ineffective but are self-defeating. So it’s time for a new approach to Gold.
One of the factors that influence the price of Gold is interest rates. A dry subject potentially but the clues around us tell us which paths in life ahead of us are going to be more profitable. It has long been held that when interest rates go up, the price of Gold goes down. This is because many market investors believe that interest linked investments become more profitable than Gold during these times because Gold technically brings with it no interest.
But something unusual is happening in the relationship between Gold and interest rates. Put simply, the last six times the interest rates were raised in the U.S. the price of Gold didn’t fall, it established a new resistance at a higher price:
“The gold price has rallied decisively after the past six Fed rate hikes of this cycle. Analysts constantly expect the gold price to be bolstered again after the seventh rate hike,” (Seeking Alpha).
Proactive Investor agrees and upholds this slightly new and surprising trend:
“In one sense that’s slightly surprising, as the standard inverse correlation of gold to the dollar, would dictate that as the coupon on the dollar rises, so the attractiveness of zero-coupon gold declines,” (Proactive Investors).
I very much like the way this is expressed – coupons. That is exactly what our paper currency is ‘a coupon’ to promise us payment of some kind. Many investors and commentators alike have taking the simple view that because Gold produces no interest, it is not an attractive investment during times of higher interest rates. This view is therefore either changing or being over-ridden by something within the market itself, which is quietly strengthening the Gold price action, regardless of what is being thrown at it.
This change shows that to be successful at even beginning to navigate the projection of where the Gold price is moving, we need to keep our eyes on multiple juggling balls, all at different stages in their arc of projection.
You know we really enjoy listening to a variety of financial perspectives from around the world and today’s comes from Australia, our diametrically opposite global cousins; looking out at a different hemisphere of night stars and observing their bath water drain in the opposite direction.
The Interest Rate Story
A lot of analysts think higher US interest rates aren’t good for gold. Perhaps that’s why gold has pulled back lately. I have warned that US interest rates will rise four times this year. You’d think that’s not good news. But, until the latest interest rate rises earlier in the month, higher interest rates have supported the gold price since 2015. Take a look at the chart below:
It shows that every time since December 2015, US interest rate hikes have actually formed a new higher low. That’s a technically bullish pattern, (Markets and Money).
So, what might be the reasons for this new emerging opposite action to price expectations in Gold? It’s a key question to ask if we want to try to stay ahead of the price curve in our own Gold and Silver investing.
The first reason may well be that – put simply – some people just aren’t buying the facade anymore. Maybe they have a sixth sense that the paper currencies are a house of cards waiting to implode and return to their inherent worth, which is just a flimsy disintegrating piece of paper.
By complete and utter contrast, to hold Gold is an entirely different paradigm. To value physical Gold over paper is a really simple decision when faced with the touch of both by comparison. It’s just that the majority of people have never, ever held the real thing.
And that is precisely why the vast majority of people we meet carry paper around with them, not Gold. Because very very few have actually held and marveled at the physical inherent beauty of real Gold bullion.
So, one reason is people aren’t buying the illusion anymore. Two other commentators give two further reasons. This first is that people didn’t expect the interest rates to rise so quickly in the US, so that is making the markets nervous, which benefits Gold:
“The market expected three rate rises this year. But it’s now preparing for the fourth, and the mood’s changing. That might be shocking the market… It wasn’t prepared for significantly higher rates. But that’s starting to change, which could be a good thing for gold this year. If the US Federal Reserve increases interest rates another two times this year, gold could skyrocket. Drawing a simple correlation of the gold price and interest rate increases — like I did on the charts above — would light up most people’s eyes.” (Markets and Money)
And the second reason explored is geopolitical, specifically relating to the current US President:
“Still, for now at least, [Trumps] foreign policy that will likely have the most impact on the gold price if as now seems clear, the market is already pricing in further rate rises.
Gold remains the number one safe haven
Middle Classes that are alarmed at Mr. Trump’s tearing up of diplomatic norms and disregard for old and trusted allies may very well be inclined to make significantly more purchases of gold in the coming years than they might otherwise have done.
This is no small statement to make as far as the gold market is concerned. True, the American Middle Class isn’t the unquestioned force it once was, but it still represents one of the largest pools of capital in the world. If these people are unnerved by President Trump’s riling of Canada, his snubbing of Britain, his disdain for France, his disregard for Germany, his antagonism of Iran, his courting of Russia, his admiration for North Korea, his contempt for climate change science, his attack on the law, and even his undermining of his own Republican Party, then could it be that they will pile in and support gold, even while the dollar surges on the back of strong economic news?
And it’s not only the American Middle Class. What sort of a world are the newly emerging Middle Classes of India and China waking up in? One in which the material wellbeing they are now enjoying is no longer matched by the same cultural and political certainties of old.
So, the deepening pool of Middle-Class capital in these two Asian behemoths might be drawn to gold in ever-increasing amounts in a world where economic well-being and safety are no longer quite so intertwined as they once were.
That could put quite a floor on the gold price and will certainly act as a counterbalance to the ongoing downward pressure from Fed rate rises.
Just a quick note that our own interest rate was held in May, but Gold is both a timeless and a global precious metal of value, and an international measure of wealth. So, consider what is happening in the States as an early warning of what will happen here in Great Britain.
What a clear and stunning conclusion. It is quite something when an established paradigm comes undone. Life never quite looks the same, because it never will be. We could essentially take our pick of the three reasons, or even hold that all three have a part to play. Either way, Gold is rising from every counter-measure thrown at her and be, as always, the timeless winner in this financial facade of smoke and mirrors. Call Bleyer now on 01769 618618 or buy online at www.bleyerbullion.co.uk.