gold and interest rates

What Happens To Gold Price If The Fed Doesn’t Cut Rates?

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GOLD PRICE IF THE FED DOESN’T CUT

With the increasing gold price of late comes the assumption that the expected cut in interest rates will open a torrent of cheap money that will bring the U.S. dollar down with a thud.  But, what would happen to the gold price if the Fed doesn’t cut interest rates?

What seemed like a universally expected event may not be as likely as some have assumed. In fact, the Fed has a history that includes examples of pivots and re-pivots; or, ignoring the presumed pivot and staying the course.
You can read more about the possibility that the Fed might not cut interest rates in my article Investors Are Too Anxious For Rate Cuts.

In this article we will address the implications for gold if the Fed doesn’t cut interest rates. It matters not what the reasoning is behind such a possibility. What matters is that much of what has happened to prices for gold, stocks, bonds, etc., is based on the presumption that several interest rate cuts are forthcoming, possibly before the end of the year. Hence, there is a potential shock for investors who have relied on that presumption, as well as the particular logic mentioned in our opening paragraph above, should the Fed not follow through.

IMPLICATIONS AND POSSIBILITIES

Ignoring for now the finer (and more critical) point of inflation-adjusted returns, both gold and stocks are at all-time highs. What might happen to gold if a “potential shock” becomes a reality? It depends.

To the extent that a more significant portion of money used to fund the purchase of gold recently was done so based on the presumed cuts in interest rates and a clear change in direction, then we could see a significant decline in the gold price; at least temporarily. This might also happen if interest rate cuts are delayed. Market participants in both stocks and gold would likely see any inaction or hesitancy by the Fed regarding interest rate cuts as negative for their investment outcomes and expectations.

Another possibility is that any effects on the gold price could be muted. That has more to do with other factors, not interest rates. For example, if the prevailing thoughts dominant in the minds of those placing a larger portion of the money flowing into gold is not based on concern about interest rates, rather on anything else, then it is entirely possible that the gold price might show little reaction to non-cuts in interest rates.

OTHER FACTORS, SUMMARY

Some buyers in the gold market are not thinking so much about interest rates. Their concerns have more to do with the continual loss of purchasing power in the U.S. dollar. The erosion of U.S. dollar purchasing power is the result of ongoing inflation, which is the intentional debasement of money by governments and central banks. The continuous expansion of the supply of money and credit for more than a century has resulted in a dollar which has lost ninety-nine percent of its purchasing power.

Over time the gold price is historically correlated to that decline in the purchasing power of the dollar. Gold is real money and a long-term store of value.

Whether buyers of gold are individuals (retail investors), speculators, hedge funds, governments, or central banks; and whatever the reasoning behind their purchases, which reasoning is quite often temporary; in the end, it is still all about the U.S. dollar. (also see U.S. Dollar Best Of The Worst; Gold Best Of The Best)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Viewing Gold In Its Proper Context

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Viewing gold in its proper context seems to be difficult for most gold bugs. The excitement associated with anticipation of gold at $3000, $10,000, or higher tends to overide real fundamentals and common sense.

Not a few of the predictions for a new, higher gold price are just wild guesses. Some of the reasons given to support those guesses include a Fed pivot and reduction in interest rates, geopolitical concerns, a recession and weak economic activity, and a collapse in the U.S. dollar. There are others, but for now, lets look at these.

GOLD AND INTEREST RATES 

Financial writers in the media continue to refer to “gold’s correlation with interest rates”. The theory is that higher interest rates are negative for gold (the gold price) because gold doesn’t pay interest. Hence, investors tend to shun gold when interest rates are rising and look elsewhere for a higher return.

Time and again, the following statement or something similar finds its way into gold commentary:

“…prospects of higher US interest rates have the ability to limit upside gains. It must be kept in mind that Gold is a zero-yielding asset that tends to lose its allure in a high-interest rate environment”  

A variation of that statement:

“Because gold doesn’t bear interest, it struggles to compete when interest rates rise.” 

The statements imply a correlation between gold and interest rates. The implied correlation suggests that higher interest rates result in lower gold prices, however…

Between 1970 and 1980, the price of gold increased from $35.00 per ounce to $850.00 per ounce. Rather than declining, though, interest rates were rapidly rising.

Gold galloped ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments including U.S. Treasury Bonds. The 10-year U.S. Treasury bond yield exceeded 15%!!! This contrasts markedly from what happened thirty years later.

During the ten-year period 2001-2011, the price of gold increased from $275.00 per ounce to a high of almost $1900.00 per ounce. Yet, interest rates, which had been declining since the 1980s, continued  their descent (helped along by the Fed, of course).

Two ten-year periods of outsized gains in the price of gold while interest rates were doing something exactly opposite during each period. There is no correlation between gold and interest rates.

GOLD AND GEOPOLITICAL CONCERNS 

Any apparent effects from geopolitical issues are temporary at best, and there is no reason to expect them to have any measurable or lasting impact on the gold price unless the U.S. dollar is affected negatively.

(See my article The Gold Price And Geopolitical Concerns for examples; i.e., Russia vs. Ukraine, Israel vs. Hamas, The War with Iraq, etc.).

GOLD AND RECESSION FEARS

A recession is a period of weak economic activity. Even a severe recession will not have an appreciable effect on the gold price.

If the recession deepens and economic activity declines severely,  the result could be a full-scale depression.

In most cases, events of this nature are accompanied by deflation. Deflation is the opposite of inflation and results in a stronger currency (USD) which gains in purchasing power.

The gain in purchasing power means you can buy more with your dollars – not less. The downside is that there are fewer dollars to go around. There would be a huge price collapses in prices for all assets, investments, goods and services. The gold price would be similarly affected.

GOLD AND DOLLAR COLLAPSE 

There are expectations by some for a complete collapse in the U.S. dollar resulting in hyperinflation; similar to Germany in the 1920s, Zimbabwe, or Venezuela.

That is possible, but it is unlikely.  A credit collapse and deflation are more likely since the Federal Reserve fuels inflation with cheap credit. A credit collapse would trigger huge price declines in all assets, including gold. The most likely result would be a full-scale depression that could last for years.

Even if the U.S. dollar were to collapse, the price of gold in dollars would be meaningless.

VIEWING GOLD IN ITS PROPER CONTEXT 

Gold is real money and a long-term store of value. It is also original money. Gold was money before the U.S. dollar and all paper currencies; and, all paper currencies are substitutes for gold, i.e., real money.

The higher price of gold over time reflects the ongoing loss of purchasing power in the U.S. dollar. In other words, the price of gold tells us nothing about gold.

The gold price tells us only what has happened to the U.S. dollar. The same thing is true if gold is priced in any other fiat currency.

Over the past century, the dollar has lost ninety-nine percent of its purchasing power. This means that it costs one hundred times more for the things you buy today than it would absent the effects of inflation.

The original fixed price of gold was $20.67 oz. Convertibility allowed exchange of $20.00 in paper money for one ounce of gold and vice versa.

At $2000 oz., gold today is one hundred times higher and reflects the actual ninety-nine percent loss of USD purchasing power.

The gold price only moves higher to reflect the dollar’s loss of purchasing power after the fact;  never before.

Expectations for a much higher gold price based on anything other than the loss of U.S. dollar purchasing power will not be realized.

A much higher gold price can only present itself after further, significant loss of U.S. dollar purchasing power.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Gold And US Treasuries – Punctures In The Everything-Bubble

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GOLD AND US TREASURIES 

The price of gold early Friday morning this past week touched $1720. At that level it was down $350 per ounce from its high point of $2070 last August.

The size of the decline is not unusual at face value. But, in light of the expectations for hugely higher inflation rates and much higher gold prices that have dominated the headlines over the past year, the drop might signal a cause for concern among gold bulls.

Meanwhile, eyes are fixed on interest rates for US Treasury bonds. During the same six-month period (August 2020 – February 2021) during which the price of gold fell by seventeen percent, the price of the 20-year US Treasury bond fell by twenty percent. That IS a huge deal, as it corresponds to sharply higher interest rates from less than 1% last August to as high as 2.26% just the other day.

The rush to proclaim correlation between interest rates and gold has resumed. Also, warnings and predictions of much higher inflation from around the globe are increasing.

As we have said on several occasions, there is no correlation between gold and interest rates (see Gold And Interest Rates – There Is No Correlation).

This can be seen on the charts below. The first chart (source) is a history of gold prices over the past fifty-six years and the second chart (source) is a history of interest rates over the same time period…

GOLD PRICES 1965-2021

 

10 YEAR US TREASURY RATE 1965-2021

During the 1970s, the price of gold rose from $40 per ounce to an intraday peak of $850. All throughout that time, the interest rate on the 10-year US Treasury bond rose higher and higher; from approximately 4% to 12.5%.

However, during the years 2000-2011, while the price of gold rose from $250 to $1900, interest rates on the 10-year US Treasury bond dropped from 6% to 2%.

The two decade-long periods provide contradictory results for the argument that lower interest rates are correlated to higher gold prices.

And for those who argue that the higher rates we are currently seeing are an indication of significantly higher inflation, then why is the gold price declining?

The higher interest rates are possibly a market reaction to the brutal effects of infinite credit creation and interest rate manipulation by the Federal Reserve.

The entire world economy is funded with cheap credit and most economic activity is dependent on it.  The prices for all financial assets misrepresent and grossly exaggerate any underlying fundamental value.

Higher rates might trigger a credit collapse so severe that any asset could decline in price by fifty percent or more.

As for gold, it would also decline – to a level commensurate with whatever strength the US dollar attains.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT  and  ALL HAIL THE FED!

A Lesson About Gold – How Bullish Can It Be?

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A Lesson About Gold

Apparently, there is no limit. This seems especially true right now with all of the “obvious” signs and indicators staring you in the face. It is almost blasphemous to speak cautiously. Better to let your imagination run wild and join in the revelry.

I can’t do that. I don’t choose to be dumped into the same cauldron of boiling fantasy with other analysts and advisors, who tout and promote based on the latest headlines. There has to be more to it. I think there is.

Read more

Gold And Interest Rates – No Correlation

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GOLD AND INTEREST RATES 2001-11

Over and over again, the following statement or something similar continues to find its way into commentary about gold:

“…prospects of higher US interest rates have the ability to limit upside gains. It must be kept in mind that Gold is a zero-yielding asset that tends to lose its allure in a high-interest rate environment”  

A variation of that statement:

“Because gold doesn’t bear interest, it struggles to compete when interest rates rise.” 

The statements imply a correlation between gold and interest rates. And the implied correlation suggests that higher interest rates result in lower gold prices.

If that is the case, then there should be some historical precedent to corroborate the correlation. There is. And we only need to go back a few years or more to find it. But it does not corroborate the correlation; it refutes it.

During the ten-year period 2001-2011, gold’s price increased from $275.00 per ounce to a high of nearly $1900.00 per ounce. And interest rates continued their long-term decline throughout that entire period.

In this example the original correlation is inferred to be supported by the opposite scenario  – lower interest rates and higher gold prices. So far, so good.

GOLD AND INTEREST RATES 1970-80

However, let’s go back a bit further along the time line. Between 1970 and 1980, the price of gold increased from $35.00 per ounce to $850.00 per ounce. But rather than declining, interest rates were on a tear.

Rather than “struggling to compete” gold was galloping ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments.

The higher rates were a reflection of lower prices for bonds and particularly U.S. Treasury securities. The 10-year U.S. Treasury bond yield exceeded 15%. Which makes you sort of wonder when you read something like this:

“Higher rates boost the value of the dollar by making U.S. assets more attractive to investors seeking yield.” 

Two ten-year periods of outsized gains in the price of gold. And interest rates were doing something exactly opposite during each period. There simply is no correlation between gold and interest rates.

Additionally, there is no correlation between gold and 1) social unrest, or 2) global terrorism; or 3) world wars. Gold is not a safe haven hedge and it is not an investment. It is real money.

WHY DOES GOLD PRICE CHANGE?

But is there something that correlates with gold? Anything at all? Why does its price change? And so dramatically, it seems?

With respect to gold and its price changes, there is only one thing that correlates. The U.S. dollar.

The U.S dollar is a substitute for gold. Gold is original money. The price of gold is an inverse reflection of the changing value of the U.S. dollar. The ongoing, never-ending deterioration of the dollar’s value means ever rising gold prices over time.

Gold is the standard; not the U.S. dollar. Gold has earned its designation as real money over five thousand years of history. It is original money. And it is real money because it is a store of value.

And there is historical evidence to support the correlation of gold’s price to the value of the U.S. dollar. Every change of significance in time and price for gold correlates with an inverse change in the value of the U.S. dollar. Higher prices for gold correlate with a lower value for the U.S. dollar. Lower gold prices correlate with stability and strength for the U.S. dollar.

The correlation between gold and the U.S. dollar is implicit. One does not ’cause’ the other. Either one is the inverse of the other.

Some have said that the argument about correlation of interest rates and gold depends on making a distinction between real interest rates and nominal interest rates. No correlation there, either.

That is because any patterns that appear to confirm correlation between real or nominal interest rates and gold need to include the U.S. dollar. The U.S. dollar is the determining correlative factor re: gold.

Without taking into account the relative strength or weakness of the U.S. dollar relative to gold’s price, any other correlations are either meaningless, misleading, or contradictory.

There are six major turning points (1920, 1934, 1971, 1980, 2001, 2011) on the chart (source) below. All of them coincided with – and reflect – inversely correlated turning points in the value of the U.S. dollar…

Gold Prices: 100-Year History
                                                                                               

The U.S. dollar is the world’s reserve currency and gold trades are settled in U.S. dollars. Since gold is priced in U.S. dollars and since the U.S. dollar is in a state of perpetual decline, the U.S. dollar price of gold will continue to rise over time.

There are ongoing subjective, changing valuations of the U.S. dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in U.S. dollars.  (read more here)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!