Over time we have heard from current Fed Chair Janet Yellen and her very important “news speak” words that get deciphered down to the last vowel by the minions of wall street. Below are articles where she mentions higher interest rates and its association with downward pressure to gold.
For the past couple years, If the fed starts to even mention the words “raise interest rates”, the overall stock market goes down. The thought is, the lower the interest rate, the less of a fiscal benefit people have to save money and therefore dough rushes into the stock market, forcing more to speculate. The more people buying, the higher the market goes. Another concern is, if the interest rates are lower than the inflation rate, people would be ultimately on a path to losing purchasing power over time as the effects of inflation eat into their principal. Yet another reason to buy into the stock market, right? But, we are at all time highs in the market, I thought it was best to buy low, sell high?
Gold tends to have an inverse relationship to the market. If the market goes down, gold price goes up, and vise versa. Now this doesn’t happen religiously every day, but as a unwritten rule, it tends to follow this trajectory. That being said, if interest rates go down, that would mean that the market would be happy and go up and gold would go down, right? So if rates go up and stocks go up (market assuming the overall economy is doing better), what would gold do? Which trend wins out? In a market that is not manipulated, gold would be higher due to the lack of naked short sales. You would have to own something in order to sell it. In a clean market, major financial companies that made bad bets would go bankrupt, they wouldn’t be bailed out by themselves, under a different corporation header, called “The Federal Reserve” while claiming the taxpayers are on the hook. In an actual capitalist market, the market would set the price, not an unelected board of private banksters who are allowed to “print” fiat currency with no intrinsic value ad infinitum. So, the answer is, I don’t know. An actual free capitalist market is almost a fairytale these days.
I stumbled upon this article that said a rising interest rate is a tailwind that would actually drive the price of gold higher, not lower.
I decided to do some research… I found historic pricing for gold and for the fed funds rate. Then I charted them. See below. It does in fact look like the price of gold is a leading indicator for the fed funds rate and not the other way around.
Gold is currently a hedge against inflation and has been a store of value for thousands of years. Gold has been demonized in the press as being just a tradition, not money, only a commodity for jewelry, and a relic. And yet, the IMF and ECB have no problem confiscating this artifact from countries who have defaulted on bad loans/owe zeros and ones. China hasn’t had an issue stockpiling this keepsake in her reserves. Russia hasn’t had a problem accepting this souvenir as payment for her natural resources.
Why then have countless countries demanded repatriation of their gold, especially from the federal reserve? Peter Boehringer is a 45 year old German who questions if any of Germany’s 674 tonnes of gold is underground in the vaults at the NY Federal Reserve. When Germany asked for its gold back in Jan 2013, the price of gold was in the high $1600’s. Since then, the price of gold has retraced down to roughly $1100 as I type. Pretty convenient for the Germans and a lot cheaper to buy back for the Americans, if they didn’t have it of course. The Germans have been pretty well mannered during this whole thing. If I had gold to give to a confidant for safekeeping and I didn’t get it back when I asked for it, we would cease to be allies, we’ll just say that. What was Germany promised for her patience?
Makes me think, is all of this negative press for gold along with its recent decline a bellwether to buy? What do you think?